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CONSOLIDATED 
STATEMENTS 

FOR    HOLDING    COMPANY 
AND    SUBSIDIARIES 


BY 

H.  A.  FINNEY,  Ph.  B.,  C.  P.  A. 

PKOVBSSOS  or  ACCOUNTING,  NORTHWESTERN  UNIVERSITY,  CHICAGO 


New  York 
PRENTICE-HALL,  Inc. 

1923 


71464 


Copyright,  igau,  by 
PRENnfE-HALL,  Iwa 


1st  Printing June.  1922 

2nd  Printing September,  1922 

3rd  Printing March,  1923 


PBINTEO  IN  THE  UNITED  STATES  OF  AlfKRICA 


Bus.  Admin. 
library 


HF 
C7F4 


TO 
MY  WIFE  AND  MY  MOTHER 


PREFACE 

This  book  is  intended  to  embrace  the  principles  and  pro- 
cedure involved  in  the  preparation  of  the  consoHdated  state- 
ment of  cost  of  goods  sold,  the  consolidated  profit  and  loss 
statement,  the  consolidated  surplus  statement  and  the  con- 
soHdated balance  sheet. 

Students  of  accounting  who  are  preparing  for  the  examina- 
tions of  the  various  C.  P.  A.  boards  or  the  American  Institute 
of  Accountants  must  be  familiar  with  the  subject  of  con- 
soHdated statements  for  holding  companies  and  their  sub- 
sidiaries, for  the  examinations  frequently  contain  more  or  less 
complicated  problems  requiring  the  preparation  of  such  state- 
ments. The  income  tax  law,  which  requires  consolidated 
returns  supported  by  consolidated  income  statements  and 
balance  sheets,  makes  a  knowledge  of  the  method  of  preparing 
these  statements  imperative  for  the  corporation  auditor,  the 
pubHc  accountant  and  the  tax  counsellor. 

It  is  surprising  that  the  literature  which  deals  with  con- 
solidated statements  is  so  meager  when  one  considers  that  so 
many  accountants  and  students  of  accounting  are  interested 
in  the  subject  and  that  the  statements  themselves  may  be 
involved  by  an  almost  infinite  variety  of  compHcations.  These 
complexities  arise  from  the  fact  that  the  holding  company 
may  or  may  not  account  properly  for  the  investments  in  sub- 
sidiary stock;  that  minority  interests  may  exist;  that  sub- 
sidiary earnings  since  acquisition  may  exceed  dividends  re- 
ceived during  the  same  period,  or  vice  versa;  that  the  holding 
company  may  take  up  as  profit  the  earnings  of  the  subsidiary 
or  the  dividends  received;  that  the  stock  may  have  been  ac- 
quired by  purchase  from  former  stockholders,  by  subscription 
or  as  a  stock  dividend;  that  book  value  at  acquisition  may  have 
exceeded  cost,  or  vice  versa;  that  the  stockholdings  may  have 
been  acquired  by  a  jingle  purchase  or  by  several  purchases; 
that  the  holdings  may  be  in  common  or  preferred  stock  or 
both;  that  inter-company  profits  may  remain  unrealized  in 
inventories  and  in  fixed  assets;  etc.,  etc. 


vi  PREFACE 

The  book  contains  a  discussion  of  underlying  principles, 
illustrations  showing  the  procedure  of  preparing  consolidated 
working  papers  and  statements,  and  supplementary  exercises 
and  problems  to  be  solved  by  the  reader. 

On  several  phases  of  consolidated  statements  there  is  some 
conflict  of  opinion  as  to  the  proper  procedure  and  considerable 
variation  in  practice.  This  is  particularly  true  in  the  matters 
of  minority  interest  in  a  subsidiary  with  a  deficit,  negative 
goodwill,  and  reserves  for  unrealized  profit  when  there  are 
minority  interests.  Where  practice  has  not  been  standardized 
the  fact  is  commented  upon,  the  different  methods  of  procedure 
are  discussed,  and  the  method  which  seems  to  the  author  to  be 
correct  in  principle  is  indicated. 

It  scarcely  seems  necessary  to  remind  the  reader  that  ac- 
counting principles  and  income  tax  regulations  do  not  always 
coincide.  Taxable  net  income  and  invested  capital  do  not 
always  agree  with  the  figures  shown  in  the  revenue  statement 
and  the  balance  sheet,  yet  these  statements  are  the  basis  of  a 
corporation's  tax  return,  and  the  consolidated  profit  and  loss 
statement  and  balance  sheet  are  the  basis  of  a  consoHdated 
return.  This  book  is  not  an  interpretation  of  the  regulations 
pertaining  to  consoHdated  returns,  but  is  an  explanation  of 
the  accounting  principles  underlying  the  consolidated  state- 
ments which  must  be  submitted  in  support  of  the  return. 

The  author  wishes  to  acknowledge  his  obligation  to  his 
friend  Roy  Hall,  C.P.A.,  who  read  the  manuscript  and  offered 
helpful  criticisms  and  suggestions. 

H.  A.  Finney 
Chicago,  Illinois 
May  15,  1922 


CONTENTS 

CHAPTER  FiOX 

I.    Consolidations,  Mergers,  Holding  Companies 1 

II.    The  Balance  Sheet  of  a  Holding  Company 9 

III.    Subsidiary  Surplus  or  Deficit  at  Acquisition 16 

rV.    Minority  Interest 20 

V.    Goodwill 25 

VI.    Deduction  from  Goodwill 34 

VII.    Subsidiary's  Profits,  Losses  and  Dividends  on  the  Holding  Com- 
pany's Books 42 

VTII.    Consolidated  Balance    Sheet  after  Date  of  Acquisition;   Sub- 
sidiary Profits  and  Losses  Taken  Up 47 

IX.    Consolidated  Balance  Sheet  after  Date  of  Acquisition;  Invest- 
ment Account  Carried  at  Cost 54 

Review  Exercises 62 

X.    Inter-Company  Receivables  and  Payables      .......  65 

XI.    Miscellaneous  Topics: 

Book  Value  at  Acquisition  in  Excess  of  Cost 74 

Minority  Interest  in  a  Subsidiary  with  a  Deficit 75 

Stock  Acquired  by  Subscription  from  Subsidiary 78 

Subscription  Rights 79 

No  Par  Value  Stock 81 

Holdings  of  Both  Common  and  Preferred  Stock 81 

Stock  Dividends 85 

Arbitrary  Entries  in  Investment  Account 87 

XII.    Major  Holding  Co.mpany  Control  through  a  Minor   Holding 

Company 89 

XIII.  Unrealized  Inter-Company  Profits 103 

XIV.  Consolidated  Profit  and  Loss  and  Surplus  Statements;  Separate 

Working  Papers 110 

XV.    Consolidated  Profit  and  Loss  Statement,  Surplus  Statement  and 

Balance  Sheet;  Combined  Working  Papers 128 

Problems 151 


vB 


Chapter  I 

CONSOLIDATIONS,   MERGERS,   HOLDING 
COMPANIES 

Methods  of  effecting  combinations. — When  it  is  desired  to 
combine  two  or  more  corporations  into  a  single  company  or 
into  a  co-ordinated  organization  with  a  centraHzed  control, 
the  result  may  be  accomplished  by  several  means,  the  most 
common  of  which  are  a  consolidation,  a  merger,  and  a  holding 
company. 

As  a  simple  illustration  of  these  three  methods  of  effecting 
combinations,  it  will  be  assumed  that  the  two  companies  whose 
balance  sheets  appear  below  are  to  be  combined. 

BALANCE  SHEET— COMPANY  A 

Machinery $25,000        Accounts  Payable $10,000 

Merchandise  Inventory 15,000        Capital  Stock 35,000 

Cash 5,000 

$45,000  $45,000 


BALANCE  SHEET-COMPANY  B 

Machinery $35,000        Accounts  Payable $15,000 

Merchandise  Inventory 25,000        Capital  Stock 50,000 

Cash 5,000 

$65,000  $65,000 


Consolidation. — A  consolidation  is  effected  by  organizing  a 
new  corporation  which  buys  the  assets  and  assumes  the 
liabilities  of  the  old  companies.  The  new  company  may  sell 
its  stock  for  cash  and  pay  the  old  companies  in  cash  for  their 
net  assets,  or  it  may  issue  its  stock  to  the  old  companies  in 
payment  for  their  net  assets.  In  either  case  the  old  companies 
go  out  of  existence,  distributing  among  their  stockholders  the 
cash  or  stock  received  from  the  new  company. 

1 


2  CONSOLIDATED  STATEMENTS 

To  illustrate,  it  will  be  assumed  that  Company  C  is  organ- 
ized with  a  capital  stock  of  $85,000;  and  contracts  are  entered 
into  with  Company  A  and  Company  B  whereby  it  is  agreed 
that  Company  C  shall  take  over  the  assets  of  the  two  companies 
at  their  book  value,  assume  their  liabilities,  and  pay  for  the 
net  assets  in  stock  of  Company  C. 

Entries  of  the  consolidating  company. — Company  C  will 
make  the  following  entries  to  record  the  consolidation: 

Subscriptions $85,000 

Capital  Stock ' $85,000 

To  record  the  subscriptions  to  our  entire  authorized 
stock  issue,  as  follows: 

Company  A $35,000 

Company  B 50,000 

Total $85,000 

Machinery $25,000 

Merchandise  Inventory 15,000 

Cash 5  000 

Accounts  Payable $10,000 

Company  A,  Vendor 35,000 

To  record  the  purchase  of  the  assets  of  Company  A 
and  the  assumption  of  their  liabilities,  in  ac- 
cordance with  the  contract  dated .  Pay- 
ment to  be  made  in  the  stock  of  this  company. 

Company  A,  Vendor 35,000 

Subscriptions 35,000 

To  record  the  offset  of  our  liability  to  Company  A  for 
their  net  assets  against  their  liability  to  us  on 
account  of  subscriptions  to  our  stock. 

Machinery $35,000 

Merchandise  Inventory , 25,000 

Cash 5,000 

Accounts  Payable 15,000 

Company  B,  Vendor 50,000 

To  record  the  purchase  of  the  assets  of  Company  B 
and  the  assumption  of  their  liabilities,  in  accord- 
ance with  the  contract  dated .     Payment 

to  be  made  in  the  stock  of  this  company. 

Company  B,  Vendor $50,000 

Subscriptions $50,000 

To  record  the  offset  of  our  liability  to  Company  B 
for  their  net  assets  against  their  liability  to  us 
on  account  of  subscriptions  to  our  stock. 


CONSOLIDATIONS— MERGERS  3 

Balance  sheet  of  the  consolidation. — ^After  the  consolidation 
has  been  effected,  the  balance  sheet  of  the  new  company  will 
show  all  of  the  assets  and  liabilities  formerly  owned  by  the 
old  companies,  and  now  owned  by  the  new  or  consolidated 
company. 

BALANCE  SHEET— COMPANY  C  ^ 

Machinery $60,000        Accounts  Payable $25,000 

Merchandise  Inventory 40,000        Capital  Stock 85,000 

Cash 10,000 

$110,000  $110,000 


Entries  of  the  absorbed  companies. — ^The  entries  of  Com- 
pany A  and  Company  B  will  be  similar  to  each  other  and  will 
show  the  sale  of  their  assets  to  Company  C,  the  assumption 
of  their  liabiHties  by  Company  C,  the  receipt  of  stock  in  pay- 
ment for  their  net  assets,  and  the  distribution  of  this  stock 
among  their  stockholders.  These  entries  will  be  illustrated  by 
showing  those  which  will  appear  on  the  books  of  Company  A. 

Company  C,  Vendee $35,000 

Accounts  Payable 10,000 

Machinery $25,000 

Merchandise  Inventory 15,000 

Cash 5,000 

To  record  the  sale  of  our  assets  to  Company  C  and  the  assump- 
tion by  them  of  our  liabilities;  payment  for  net  assets  to  be 
made  in  stock  of  Company  C,  in  accordance  with  the  con- 
tract of  sale  dated .     See  Minutes,  page . 

Stock  of  Company  C $35  000 

Company  C,  Vendee $35,000 

To  record  the  receipt  of  stock  of  Company  C  in  payment  for  net 
assets  transferred  to  them. 

Captal  Stock $35,000 

Stock  of  Company  C $35,000 

To  record  the  distribution  of  the  stock  of  Company  C  among 
our  stockholders  in  final  liquidation  of  this  company. 

Thus  it  will  be  seen  that  Company  A  and  Company  B  go 
out  of  existence.  They  have  no  assets  nor  liabilities,  and  all 
of  the  assets  and  liabilities  of  the  consolidation  are  shown  on 
the  balance  sheet  of  Company  C. 

Merger. — If  a  merger  is  decided  upon,  a  new  corporation 
will  not  be  organized.     One  of  the  old  companies  will  purchase 


4  CONSOLIDATED  STATEMENTS 

the  assets  and  assume  the  liabilities  of  the  other  company, 
paying  for  the  net  assets  either  in  cash  or  in  stock.  As  the 
company  which  has  been  bought  out  will  go  out  of  existence, 
the  merger  as  well  as  the  consolidation  results  in  a  complete 
corinbination  of  the  two  old  companies  into  a  single  company. 

To  illustrate,  it  will  be  assumed  that  Company  A  contracts 
with  Company  B  to  purchase  its  assets  at  book  value,  assume 
its  liabilities,  and  pay  for  the  net  assets  in  stock  of  Company 
A.  In  order  to  provide  the  necessary  stock  for  this  purpose, 
Company  A  increases  its  authorized  capitalization  from 
$35,000  to  $85,000. 

Entries  of  the  purchasing  company. — Company  A  will 
make  the  following  entries  to  record  the  merger: 

Subscriptions $50,000 

Capital  Stock $50,000 

To  record  an  addition  of  $50,000  to  our  authorized  stock,  all  of 
which  has  been  subscribed  for  by  Company  B,  to  be  paid 
for  by  a  transfer  of  their  net  assets. 

Machinery $35,000 

Merchandise  Inventory 25,000 

Cash 5,000 

Accounts  Payable $15,000 

Company  B,  Vendor 50,000 

To  record  the  purchase  of  the  assets  of  Company  B  and  the 
assumption  of  their  liabilities,  in  accordance  with  the  con- 
tract dated  .     Payment  for  the  net  assets  to  be 

made  in  the  stock  of  this  company. 

Company  B,  Vendor $50,000 

Subscriptions $50,000 

To  record  the  offset  of  our  liability  to  Company  B  for  their  net 
assets  against  their  liability  to  us  on  account  of  subscrip- 
tions to  our  stock. 

Balance  sheet  of  the  merger. — ^After  the  merger  has  been 
effected,  the  balance  sheet  of  Company  A  will  show  all  of  the 
assets  and  liabilities  formerly  shown  by  the  balance  sheets  of 
the  two  companies. 

BALANCE  SHEET— COMPANY  A 

Machinery $60,000        Accounts  Payable $25,000 

Merchandise  Inventory 40,000        Capital  Stock 85,000 

Cash 10,000 

$110,000  $110,000 


CON  SOLI  DA  TIONS— MERGERS  5 

Entries  of  the  absorbed  company. — Company  B  will  make 
entries  to  record  the  transfer  of  its  assets  and  liabilities  to 
Company  A,  the  receipt  of  the  stock  in  settlement,  and  the 
distribution  of  this  stock  among  its  own  stockholders. 

Company  A,  Vendee $50,000 

Accounts  Payable 15,000 

Machinery $35,000 

Merchandise  Inventory 25,000 

Cash 5,000 

To  record  the  sale  of  our  assets  to  Company  A  and  the  assump- 
tion by  Company  A  of  our  liabilities;  payment  for  net  as- 
sets to  be  made  in  stock  of  Company  A,  in  accordance  with 
the  contract  of  sale  dated .     See  Minutes,  page . 

Stock  of  Company  A $50,000 

Company  A,  Vendee $50,000 

To  record  the  receipt  of  stock  of  Company  A  in  payment  for 
the  net  assets  transferred  to  them. 

Capital  Stock $50,000 

Stock  of  Company  A $50,000 

To  record  the  distribution  of  the  stock  of  Company  A  among 
our  stockholders  in  final  liquidation  of  this  company. 

Thus  it  will  be  seen  that  Company  B  goes  out  of  existence; 
it  has  no  assets  nor  liabilities,  and  all  of  the  assets  and  lia- 
bilities of  the  merged  companies  are  shown  in  the  balance  sheet 
of  Company  A. 

Holding  company. — If  the  holding  company  procedure  is 
adopted,  one  of  the  old  companies  may  act  as  the  holding 
company,  or  a  new  corporation  may  be  organized  to  act  in 
that  capacity.  The  holding  company  does  not  deal  directly 
with  the  other  companies,  and  does  not  buy  their  assets  nor 
assume  their  liabilities.  It  deals  with  the  stockholders  of  the 
old  companies,  buying  all  of,  or  a  controlling  interest  in,  their 
stock.  The  company  acquiring  the  stock  is  called  a  holding 
company  or  parent  company,  and  the  companies  whose  stock 
is  acquired  by  the  holding  company  are  called  subsidiaries. 

The  holding  company  may  pay  for  the  subsidiary  stock  in 
cash,  and  if  this  is  done  the  former  stockholders  of  the  sub- 
sidiaries do  not  become  stockholders  of  the  holding  company. 
On  the  other  hand,  the  holding  company  may  issue  its  own 
stock  in  payment  for  the  acquired  stock,  and  if  this  is  done  the 
former  stockholders  of  the  subsidiaries  become  stockholders 
of  the  holding  company. 


6  CONSOLIDATED  STATEMENTS 

Outline  of  illustrations. — ^Three  illustrations  of  the  holding 
company  procedure  will  be  given  in  this  chapter,  which  may 
be  divided  into  two  groups  as  follows: 

Group  I.  New  corporation  organized  to  act  as  holding 
company. 

First  illustration:  Stockholders    of   old    companies    re- 
ceive stock  in  payment. 
Second  illustration:  Stockholders  of  old  companies  re- 
ceive cash  in  payment. 

Group  II.  Oneof  the  old  companies  acts  as  holding  company. 
Third  illustration:    Stockholders  of  subsidiary  receive 
stock  in  payment. 

First  illustration. — It  will  be  assumed  in  this  illustration 
that  a  new  corporation  called  Company  C  is  organized  to  act 
as  a  holding  company.  Its  charter  authorizes  it  to  issue  stock 
totalHng  $85,000.  All  of  the  stockholders  of  Company  A  and 
Company  B  agree  to  sell  their  holdings  in  these  companies  to 
Company  C,  taking  in  payment  therefor  an  equal  number 
of  shares  of  the  stock  of  Company  C. 

The  entries  on  the  books  of  Company  C,  the  holding  com- 
pany, are: 

Subscriptions $85,000 

Capital  Stock $85,000 

To  record  subscriptions  to  our  stock  as  follows: 

Stockholders  of  Company  A $35,000 

Stockholders  of  Company  B 50,000 

Total $85,000 


Investment  in  Stock  of  Company  A $35,000 

Investment  in  Stock  of  Company  B 50,000 

Subscriptions $85,000 

To  record  the  payment  of  subscriptions  by  transfer  to  us  of 
stock  of  Company  A  and  Company  B. 

The  balance  sheet  of  the  holding  company  will  appear  as 

follows: 

BALANCE  SHEET— COMPANY  C 

Investment  in  Stock  of  Co.  A  $35,000        Capital  Stock $85,000 

Investment  in  Stock  of  Co.  B    50,000 

$85,000  $85,000 


CONSOLIDATIONS— MERGERS    -  7 

The  only  entries  on  the  books  of  Companies  A  and  B  will 
be  made  in  their  stock  ledgers,  recording  the  transfer  of  stock 
from  the  sundry  stockholders  to  Company  C.  These  com- 
panies are  not  parties  to  the  transaction,  they  retain  the  same 
assets  and  liabilities  as  before,  and  their  balance  sheets  are 
not  affected  by  the  change  in  the  ownership  of  their  stock. 

Second  illustration. — It  will  be  assumed,  in  this  illustration, 
that  the  new  Company  C  sells  its  stock  for  cash  to  various 
individuals  not  formerly  stockholders  of  either  Company  A 
or  Company  B,  and  with  the  proceeds  of  the  stock  issue  it 
buys  at  par  all  of  the  stock  of  the  two  original  companies. 

The  entries  on  Company  C's  books  are  as  follows: 

Subscriptions $85,000 

Capital  Stock $85,000 

To  record  the  subscriptions  to  our  authorized  issue 

Cash $85,000 

Subscriptions $85,000 

To  record  the  collection  of  subscriptions 

Investment  in  Stock  of  Company  A $35,000 

Investment  in  Stock  of  Company  B 50,000 

Cash $85,000 

To  record  the  purchase  of  all  of  the  outstanding  stock  of  Com- 
panies A  and  B  at  par  value 

The  balance  sheet  of  the  holding  company  will  be  exactly 
like  the  one  shown  in  the  first  illustration,  and  the  balance 
sheets  of  the  subsidiary  companies  will  be  in  no  way  affected 
by  the  transaction,  since  they  still  retain  their  assets  and 
Habilities. 

Third  illustration.^ — It  will  be  assumed  in  this  illustration 
that  Company  A  is  to  act  as  the  holding  company.  It  in- 
creases its  authorized  stock  issue  from  $35,000  to  $85,000;  the 
additional  stock  is  subscribed  for  by  the  stockholders  of  Com- 
pany B,  who  pay  their  subscriptions  by  turning  over  their 
holdings  of  the  stock  of  Company  B.  The  entries  on  Com- 
pany A's  books  are: 

Subscriptions $50,000 

Capital  Stock $50,000 

To  record  the  subscriptions  to  our  additional  authorized  capital 
stock 

Investment  in  Stock  of  Company  B $50,000 

Subscriptions $50,000 

To  record  the  payment  of  subscriptions  in  stock  of  Company  B 


8  CONSOLIDATED  STATEMENTS 

The  balance  sheet  of  the  holding  company  after  recording 
these  transactions,  will  be: 

COMPANY  A— BALANCE  SHEET 

Investment  in  Stock  of  Co.  B  $50,000  Accounts  Payable $10,000 

Machinery 25,000  Capital  Stock 85,000 

Merchandise  Inventory 15,000 

Cash 5,000 

$95,000  $95,000 


The  balance  sheet  of  Company  B  will  not  be  affected  by 
the  transaction. 


Chapter  II 

THE  BALANCE  SHEET  OF  A  HOLDING  COMPANY 

Balance  sheet  after  consolidation. — In  the  illustration  on 
page  3  it  was  shown  that  if  a  combination  is  effected  by 
means  of  a  consolidation,  one  company  will  exist  where  several 
existed  before,  and  the  balance  sheet  of  the  new  or  consoli- 
dated company  will  show  all  of  the  assets  and  liabilities  of 
the  combined  companies.  The  balance  sheet  of  the  consolida- 
tion shown  on  page  3  was: 

BALANCE  SHEET— COMPANY  C 

Machinery $60,000        Accounts  Payable $25,000 

Merchandise  Inventory 40,000        Capital  Stock 85,000 

Cash 10,000 

$110,000  $110,000 


Company  A  and  Company  B  went  out  of  business  and  have 
no  balance  sheets. 

Balance  sheet  after  merger. — In  the  illustration  on  page 
4  it  was  shown  that  if  the  combination  was  effected  by 
means  of  a  merger,  one  of  the  old  companies  would  continue  in 
existence  and  its  balance  sheet  would  show  all  of  the  assets  and 
liabilities  of  the  combined  companies.  The  balance  sheet 
after  the  merger,  as  shown  on  page  4,  was  exactly  like 
the  one  of  the  consolidation,  except  that  the  assets  and  liabil- 
ities had  passed  to  Company  A  instead  of  to  Company  C. 

BALANCE  SHEET— COMPANY  A 

Machinery $60,000        Accounts  Payable $25,000 

Merchandise  Inventory 40,000        Capital  Stock 85,000 

Cash IC.OOO 

$110,000  $110,000 


Balance  sheets  of  parent  and  subsidiaries. — In  the   first 
holding  company  illustration,  on  page  6,  the  balance  sheets 

9 


10  CONSOLIDATED  STATEMENTS 

of  the   several   companies   after  effecting   the    combination, 

were: 

BALANCE  SHEET— COMPANY  C 

Investment  in  Stock  of  Co.  A .   $35,000        Capital  Stock $85,000 

^   Investment  in  Stock  of  Co.  B.     50,000 


$85,000  ^  $85,000 


BALANCE  SHEET-COMPANY  A 

v^  Machinery $25,000        Accounts  Payable $10,000 

>/  Merchandise  Inventory 15,000        Capital  Stock 35,000 

Cash 5,000 


$45,000  $45,000 


BALANCE  SHEET— COMPANY  B 

Machinery $35,000        Accounts  Payable $15,000 

Merchandise  Inventory 25,000        Capital  Stock 50,000 

Cash 5,000 


$65,000  $65,000 


The  balance  sheets  in  the  second  holding  company  illustra- 
tion, on  page  7,  would  be  exactly  like  those  in  the  first 
illustration. 

In  the  third  illustration,  on  page  7,  it  was  assumed  that 
Company  A  acted  as  the  holding  company,  and  the  resulting 
balance  sheets  were: 

BALANCE  SHEET-COMPANY  A 

^  Investment  in  Stock  of  Co.  B.  $50,000        Accounts  Payable $10,000 

V  Machinery 25,000        Capital  Stock 85,000 

V  Merchandise  Inventory 15,000 

V  Cash 5,000 

$95,000  $95,000 


BALANCE  SHEET— COMPANY  B 

Machinery $35,000        Accounts  Payable $15,000 

Merchandise  Inventory 25,000        Capital  Stock 50,000 

Cash 5,000 

$65,000  $65,000 


BALANCE  SHEET  OF  A  HOLDING  COMPANY    11 

Object  of  the  consoUdated  bala.ce  sheet-When  a  co^bi: 
nation  is  effected  by  means  of  a  consolidation  or  a  merger,  a 
single  balance  sheet  contains  all  of  the  assets  and  liabilities  of 
the  combined  companies.  But  when  the  combination  is 
effected  by  means  of  a  holding  company,  each  corporation 
maintains  its  separate  legal  entity  and  prepares  its  own  balance 
sheet.  These  separate  balance  sheets  are  not  a  satisfactory 
means  of  displaying  the  financial  condition  of  the  several 
related  companies  for  two  reasons. 

In  the  first  place,  if  we  view  the  several  companies  as  separate 
corporations,  the  balance  sheet  of  each  company  should  clearly 
present  the  facts  of  its  financial  condition.  The  balance  sheets 
of  the  subsidiary  companies  do  so,  since  they  show  the  assets 
and  liabilities  of  these  companies.  The  balance  sheet  of  the 
holding  company,  however,  fails  to  do  so.  The  reason  for  this 
failure  can  be  seen  by  referring  to  the  balance  sheet  of  Company 
C  on  page  10.  This  balance  sheet  contains  two  investment 
accounts,  but  there  is  nothing  in  the  balance  sheet  to  indicate 
exactly  what  these  investments  in  stock  represent.  They 
represent  the  assets  and  liabilities  of  the  subsidiary  companies, 
and  the  balance  sheet  of  the  holding  company  would  be  a  much 
clearer  presentation  of  its  financial  condition  if  these  invest- 
ment accounts  were  dropped  out  of  the  balance  sheet  and  re- 
placed by  the  assets  and  liabiHties  of  the  subsidiaries.  For 
while  it  is  true  from  a  legal  standpoint  that  the  holding  com- 
pany owns  merely  the  stock,  it  is  also  true  from  a  business 
standpoint  that  the  holding  company  virtually  owns  and 
actually  controls  the  subsidiary's  net  assets  which  the  stock 
represents. 

In  the  second  place,  if  we  look  past  the  legal  fiction  of 
separate  corporate  entities  and  view  the  related  companies 
as  a  single  organization,  we  find  that  no  single  balance 
sheet  shows  the  total  assets  and  liabilities  of  the  organiza- 
tion, and  the  total  stock  of  the  organization  in  the  hands 
of  the  public. 

The  consolidated  balance  sheet  is  a  device  for  avoiding  these 
two  disadvantages  of  separate  balance  sheets.  The  assets  and 
liabilities  of  the  several  companies  are  all  combined,  with  the 
exception  of  those  accounts  which  represent  merely  inter- 
company relations.  The  investment  accounts  are  not  in- 
cluded among  the  assets  on  the  consolidated  balance  sheet 
because  these  accounts  do  not  represent  assets  in  and  of  them- 


12  CONSOLIDATED  STATEMENTS 

selves  but  merely  represent  the  holding  company's  right  to  the 
subsidiary's  net  assets.  The  capital  stock  accounts  on  the 
subsidiary's  books  represent  the  same  inter-company  relation 
if  the  stock  is  all  owned  by  the  holding  company;  and  when 
this  is  the  case  no  portion  of  the  subsidiaries'  capital  stock  is 
included  in  the  consolidated  balance  sheet. 

The  consoHdated  balance  sheet  thus  has  its  advantages 
whether  we  view  the  affiliated  companies  as  separate  entities  or 
as  a  single  organization.  If  we  view  them  as  separate  cor- 
porations, the  consoHdated  balance  sheet  is  a  more  adequate 
presentation  of  the  holding  company's  financial  condition  than 
is  a  balance  sheet  showing  the  investment  accounts,  for  the 
consolidated  balance  sheet  shows  the  total  assets  under  the 
control  of  the  holding  company,  the  total  liabilities  to  be 
paid  out  of  these  assets,  and  the  capital  of  the  holding 
company. 

On  the  other  hand,  if  we  view  the  several  companies  as  a 
single  organization,  the  consolidated  balance  sheet  shows  the 
financial  condition  of  this  organization  in  relation  to  the  outside 
world,  for  it  combines  all  of  the  assets  and  liabilities  of  the 
related  companies,  it  shows  the  total  stock  outstanding  in  the 
hands  of  the  public,  and  it  does  not  show  mere  inter-company 
relations  as  assets  or  liabilities  of  the  organization. 

Consolidated  working  papers. — From  the  discussion  in  the 
preceding  section,  it  will  be  apparent  that  in  preparing  a  con- 
solidated balance  sheet  it  is  necessary  to  combine  all  similar 
assets  and  liabilities  and  eliminate  all  accounts  showing  mere 
inter-company  relations.  This  work  is  facilitated  by  drawing 
up  consolidated  balance  sheet  working  papers.  These  working 
papers  contain  columns  for  the  several  balance  sheets  to  be 
consolidated,  columns  for  accounts  to  be  eliminated,  and 
columns  to  contain  the  figures  which  are  to  appear  in  the 
consolidated  balance  sheet. 

Outline  of  illustrations. — ^Two  illustrations  will  be  given 
in  this  chapter  to  show  the  method  of  preparing  consolidated 
balance  sheet  working  papers. 

First  illustration:  Holding  company  is  not  an  operating 
company,  and  has  no  assets  other  than  its  investments  in 
subsidiaries. 

Second  illustration:  Holding  company  is  an  operating 
company,  and  has  assets  other  than  its  investment  in  a 
subsidiary. 


BALANCE  SHEET  OF  A  HOLDING  COMPANY    13 

First  illustration. — ^This  illustration  is  based  on  the  balance 
sheets  at  the  top  of  page  10  which  show  the  financial  con- 
dition of  the  related  companies  when  a  new  corporation  was 
organized  to  act  as  the  holding  company. 

COMPANY  C  AND  SUBSIDIARIES  A  AND  B 

Consolidated  Balance  Sheet — Working  Papers 

(Date) 

Inter-Co.     Consolidated 

Assets                         Co.  C          Co.  A  Co,  B     Eliminations      B.  S. 

Investment  in  Stock  of  Co.  A  $35,000  ]  $35,000  j 

Investment  in  Stock  of  Co.  B   50,000  /    50,000" 

Machinery $25,000  $35,000      ' '       $60,000 

Merchandise  Inventory 15,000  25,000                               40,000 

Cash 5,000  5,000                               10,000 

$85,000     $45,000      $65,000        $85,000      $110,000 

Liabilities 
Accounts  Payable $10,000       $15,000  $25,000 

Capital  Stock: 

Co.  C $85,000  , .        85,000 

Co.  A 35,000  j  35,000 

Co.  B 50,000       )50,!K)0V 

$85,000     $45,000    '  $65,000        $85,006'     $110,000 


The  following  is  the  consolidated  balance  sheet  prepared 
from  these  working  papers. 


COMPANY  C  AND  SUBSIDIARIES  A  AND  B 

Consolidated  Balance  Sheet 

(Date) 

Machinery $60,000        Accounts  Payable $25,000 

Merchandise  Inventory 40,000        Capital  Stock 85,000 

Cash 10,000 

$110,000  $110,000 


Second  illustration. — ^This  illustration  is  based  on  the  balance 
sheets  at  the  bottom  of  page  10,  which  show  the  financial 
condition  of  the  related. companies  when  one  of  the  old  com- 
panies acts  as  the  holding  company. 


14  CONSOLIDATED  STATEMENTS 

COMPANY  A  AND  SUBSIDIARY  B 

Consolidated  Balance  Sheet — Working  Papers 

(Date) 
Assets  Co.  A 

Investment  in  Stock  of  Company  B     $50,000 

Machinery 25,000 

Merchandise  Inventory 15,000 

Cash 5,000 


$95,000 


Liabilities 

Accounts  Payable $10,000 

Capital  Stock: 

Co.  A 85,000 

Co.B 


$95,000 


Co.B 

$35,000 

25,000 

5,000 

Elim. 
$50,000 

C.  B.  S. 

$60,000 
40,000 
10,000 

$65,000 

$50,000 

$110,000 

$15,000 
50,000 

$50,000 

$25,000 
85,000 

$65,000 

$50,000 

$110,000 

The  consolidated  balance  sheet  prepared  from  these  working 
papers  is  as  follows: 

COMPANY  A  AND  SUBSIDIARY  B 
Consolidated  Balance  Sheet 
(Date) 

Machinery $60,000        Accounts  Payable $25,000 

Merchandise  Inventory 40,000        Capital  Stock 85,000 

Cash 10,000 


$110,000  $110,000 


Inter-company  eliminations. — Reasons  have  already  been 
given  for  the  elimination  of  certain  items  in  preparing  the 
consolidated  balance  sheet,  but  these  eliminations  are  so  im- 
portant that  it  may  be  well  to  re-state  these  reasons  even  though 
the  re-statement  be  merely  a  reiteration. 

It  is  to  be  borne  in  mind  that  the  consolidated  balance  sheet 
is  not  the  balance  sheet  of  any  one  company,  but  is  the  balance 
sheet  of  a  group  of  very  closely  affiliated  companies  showing 
the  financial  condition  of  the  group  of  companies  as  if  they 
were  a  single  organization.  The  essential  facts  to  be  shown 
are:  the  total  assets  of  the  organization  without  omission  or 
duplication,  the  total  liabilities  to  the  world  outside  the  or- 
ganization, and  the  total  capital  in  the  hands  of  the  pubUc. 

When  the  group  of  companies  is  thus  dealt  with  as  a  single 
company  or  organization,  any  inter-company  relations  become 


BALANCE  SHEET  OF  A  HOLDING  COMPANY    15 

virtually  inter-departmental  relations  and  have  no  place  in  a 
statement  which  is  intended  to  show  merely  the  relations  of  the 
organization  to  outsiders. 

The  investment  accounts  carried  as  assets  on  the  holding 
company's  books  are  therefore  eliminated.  These  accounts 
merely  represent  the  interest  of  the  holding  company  in  the 
subsidiary.  They  do  not  represent,  in  and  of  themselves,  an 
asset  which  could  be  used  to  pay  the  liabilities  of  the  organiza- 
tion. To  include  the  assets  of  the  subsidiary  in  the  con- 
solidated balance  sheet  and  also  the  investment  account  would 
be  a  dupHcation  and  would  result  in  an  overstatement  of  the 
assets  of  the  organization. 

When  all  of  the  capital  stock  of  the  subsidiary  is  owned  by 
the  holding  company,  the  capital  stock  account  on  the  sub- 
sidiary's books  does  not  represent  a  capital  liability  to  the 
outside  world.  The  only  outstanding  stock  is  that  issued  by 
the  holding  company.  Therefore  the  subsidiary  capital  stock 
is  dropped  out  in  the  Elimination  column. 


Chapter  III 

SUBSIDIARY  SURPLUS  OR  DEFICIT  AT 
ACQUISITION 

Conditions  common  to  preceding  illustrations. — ^All  of  the 
holding  company  illustrations  in  the  preceding  chapters  were 
made  as  simple  as  possible;  in  each  of  them  the  following  con- 
ditions prevailed: 

1.  The  consolidated  balance  sheet  was  prepared  imme- 
diately after  the  holding  company  acquired  its  holdings 
in  the  subsidiary  stock. 

2.  The  holding  company  acquired  all  of  the  subsidiary  stock. 

3.  The  price  paid  was  the  exact  book  value  of  the  acquired 
stock  as  shown  by  the  subsidiary's  books. 

4.  The  subsidiary  had  no  surplus  or  deficit  at  the  date  of 
acquisition;  therefore  the  book  value  of  its  stock  was 
represented  by  its  capital  stock  account  only. 

All  of  these  conditions  may  be  changed,  and  each  change 
will  affect  the  procedure  in  preparing  the  consolidated  balance 
sheet. 

Outline  of  illustrations. — In  the  illustrations  in  this  chapter, 
condition  (1)  will  remain  unchanged;  the  consolidated  balance 
sheet  will  be  prepared  at  the  date  of  acquisition.  Condition 
(2)  will  also  remain  unchanged;  the  holding  company  will  own 
all  of  the  subsidiary  stock.  Condition  (3)  will  also  remain 
unchanged;  the  purchase  price  will  be  exactly  book  value  at 
the  date  of  acquisition  as  shown  by  the  subsidiary's  books. 

Condition  (4)  will  be  changed  as  follows:  First  illustration: 
the  book  value  at  the  date  of  acquisition  will  be  the  sum  of 
the  capital  stock  and  surplus  accounts  of  the  subsidiary; 
Second  illustration:  the  book  value  at  the  date  of  acquisition 
will  be  the  capital  stock  of  the  subsidiary  minus  its  deficit 
account. 

Subsidiary  surplus  at  acquisition. — ^The  reader  is  now  fa- 
miliar with  the  principle  that  accounts  which  merely  represent 
inter-company  relations  are  eliminated  in   the   consolidated 

16 


SUBSIDIARY  SURPLUS  OR  DEFICIT  17 

working  papers.  In  each  preceding  illustration  the  invest- 
ment account  in  the  holding  company's  balance  sheet  was 
eliminated  because  it  represented  the  holding  company's  claim 
to  the  subsidiary's  net  assets;  and  the  subsidiary's  capital 
stock  account  was  eliminated  because  it  represented  a  capital 
liability  of  the  subsidiary  to  the  holding  company. 

If  the  subsidiary  has  a  surplus  at  the  date  of  acquisition, 
this  account  must  be  added  to  the  capital  stock  account  to 
determine  the  total  capital;  and  if  all  of  the  stock  is  owned 
by  the  parent  company,  the  surplus,  as  well  as  the  capital  stock, 
represents  a  capital  liability  to  the  holding  company,  and  is 
subject  to  the  principle  which  requires  the  elimination  of  inter- 
company accounts. 

First  illustration. — Company  A  has  just  purchased* all  of  the 
stock  of  Company  B,  paying  book  value  therefor.  This  book 
value  is  represented  by  the  sum  of  the  capital  stock  and  sur- 
plus accounts  on  the  books  of  Company  B.  The  balance 
sheets  of  the  two  companies  immediately  following  the  stock 
purchase  are  as  follows: 

BALANCE  SHEET-COMPANY  A 

Investment  in  Stock  of  Co.  B.   $65,000        Accounts  Payable $10,000 

Cash 20,000        Capital  Stock 75,000 


$85,000  $85,000 


BALANCE  SHEET-COMPANY  B 

Cash $70,000        Accounts  Payable $5,000 

Capital  Stock 50,000 

Surplus 15,000 

$70,000  $70,000 


The  investment  account  of  $65,000  represents  the  holding 
company's  right  to  the  net  assets  of  the  subsidiary;  and  the 
capital  stock  and  surplus  accounts  on  the  subsidiary's  books 
represent  the  offsetting  capital  liability  of  the  subsidiary  to  the 
holding  company.  All  are  eliminated  as  showing  mere  inter- 
company relations. 

The  reason  for  the  elimination  of  the  subsidiary  surplus  can 
be  further  explained  by  reminding  the  reader  that  the  con- 
solidated balance  sheet  is  virtually  a  balance  sheet  of  the 
holding  company,  in  which  the  investment  account  is  dropped 


18  CONSOLIDATED  STATEMENTS 

out  and  replaced  by  the  subsidiary  assets  and  liabilities  which 
it  represents.  It  would  clearly  be  wrong  to  carry  out  any  of 
the  subsidiary  surplus  to  the  consolidated  balance  sheet  and 
thus  imply  that  it  was  holding  company  surplus.  The  sub- 
sidiary surplus  was  built  up  from  earnings  prior  to  the  date 
when  the  holding  company  acquired  the  stock. 

COMPANY  A  AND  SUBSIDIARY  B 
Consolidated  Balance  Sheet — ^Working  Papers 
Assets  Co.  A  Co.  B  Elim.         C.  B.  S. 

Investment  in  Stock  of  Company  B  $65,000  $65,000 

Cash 20,000        $70,000  $90,000 

$85,000        $70,000        $65,000        $90,000 

Liabilities 

Accounts  Payable $10,000  $5,000  $15,000 

•     Capital  Stock: 

Co.  A 75,000  75,000 

Co.  B 50,000    $50,000 

Surplus: 

Co.  B 15,000    15,000 

$85,000    $70,000    $65,000    $90,000 


COMPANY  A  AND  SUBSIDIARY  B 

Consolidated  Balance  Sheet 

(Date) 

Cash $90,000        Accounts  Payable $15,000 

Capital  Stock 75,000 


$90,000  $90,000 


Subsidiary  deficit  at  acquisition. — If  the  subsidiary  has  a 
deficit  at  the  date  of  acquisition,  this  account  must  be  deducted 
from  the  subsidiary's  capital  stock  to  determine  its  net  capital. 
If  the  holding  company  acquires  all  of  the  subsidiary's  stock, 
both  the  deficit  and  the  capital  stock  must  be  considered  in ' 
determining  the  capital  liability  of  the  subsidiary  to  the  hold- 
ing company,  and  both  accounts  are  subject  to  the  principle 
which  requires  the  elimination  of  inter-company  accounts. 

Second  illustration. — Company  A  has  just  purchased  all  of 
the  stock  of  Company  B,  paying  book  value  therefor.  This 
book  value  is  shown  by  the  capital  stock  and  deficit  accounts 
pn  the  subsidiary's  books.    The  balance  sheets  of  the  two 


SUBSIDIARY  SURPLUS  OR  DEFICIT  19 

companies  need  not  be  set  out  separately  as  all  of  the  figures 
are  shown  in  the  first  two  columns  of  the  working  papers. 

COMPANY  A  AND  SUBSIDIARY  B 

Consolidated  Balance  Sheet — Working  Papers 

Assets  Co.  A  Co.  B  Elim.         C.  B.  S. 

Investment  in  Stock  of  Co.  B ... .  $45,000  $45,000 

Cash 35,000  $55,000  $90,000 

Deficit— Co.  B 15,000  15,000 


$80,000        $70,000        $60,000        $90,000 


Liabilities 

Accounts  Payable $20,000        $10,000  $30,000 

Capital  Stock: 

Co.  A 50,000  50,000 

Co.  B 60,000  60,000 

Surplus— Co.A 10,000  10,000 


$80,000        $70,000        $60,000        $90,000 


COMPANY  A  AND  SUBSIDIARY  B 

Consolidated  Balance  Sheet 

(Date) 

Cash $90,000       Accounts  Payable $30,000 

Capital  Stock 50,000 

Surplus 10,000 

$90,000  $90,000 


Chapter  IV 
MINORITY  INTEREST 

Minority  interest  an  outside  liability. — ^When  the  holding 
company  acquires  less  than  100  per  cent  of  the  stock  of  the 
subsidiary,  it  shares  the  ownership  of  the  subsidiary  with 
outsiders  whose  stock  it  fails  to  purchase.  These  outsiders 
have  an  interest  equal  to  their  stock  proportion  of  the  net 
worth  of  the  subsidiary,  and  this  capital  liability  to  outsiders 
must  be  shown  in  the  consolidated  balance  sheet. 

When  the  holding  company  owns  all  of  the  subsidiary  stock, 
the  working  papers  prepared  at  the  date  of  acquisition  elim- 
inate the  entire  capital  stock,  surplus  and  deficit  accounts 
of  the  subsidiary.  If  there  is  a  minority  interest,  it  would  be 
wrong  to  ehminate  the  capital  stock  and  surplus  or  deficit 
accounts  of  the  subsidiary  entirely,  because  they  represent 
two  things:  (1)  The  capital  liability  to  the  holding  company, 
which  is  an  inter-company  relation  and  is  therefore  eliminated; 
and  (2)  the  capital  liability  to  the  minority  stockholders, 
which  is  an  outside  relation  and  must  therefore  be  shown  in 
the  consolidated  balance  sheet. 

Outline  of  illustrations. — ^Three  illustrations  will  be  given 
in  this  chapter.  In  all  of  them  it  will  be  assumed  that  the 
balance  sheet  is  prepared  at  the  date  of  acquisition,  that  the 
holding  company  paid  book  value  for  the  shares  acquired, 
and  that  it  purchased  90  per  cent  of  the  stock  of  the  sub- 
sidiary leaving  a  minority  interest  outstanding  of  10  per  cent. 

First  illustration:  subsidiary  has  no  surplus  or  deficit  at  the 
date  of  acquisition. 

Second  illustration:  subsidiary  has  a  surplus  at  the  date  of 
acquisition. 

Third  illustration:  subsidiary  has  a  deficit  at  the  date  of 
acquisition. 

First  illustration — Minority  interest  in  capital  stock. —  In 
this  illustration  it  is  assumed  that  the  subsidiary  had  a  capital 
stock  of  $50,000  and  no  surplus  or  deficit  at  the  date  when  the 
holding  company  acquired  90  per  cent  of  its   stock,  paying 

20 


MINORITY  INTEREST  21 

exactly  book  value  therefor,  or  $45,000.  The  balance  sheets 
of  holding  company  A  and  subsidiary  B  are  indicated  in  the- 
first  two  columns  of  the  working  papers,  and  are  therefore  not 
set  out  as  separate  statements. 

COMPANY  A  AND  SUBSIDIARY  B 

Consolidated  Balance  Sheet — Working  Papers 

Jssgts  Co.  A         Co.  B         Elim.       C.  B.  S. 

Cash $65,000       $60,C00  $125,000 

Investment  in  Stock  of  Co.  B  (90%) .     45,000  45,000 

$110,000       $60,000      $45,000     $125,000 

Liabilities 

Accounts  Payable $20,0C0       $10,000  $30,000 

Capital  Stock: 

Co.  A 75,000  75,000 

Co.  B 50,000 

Eliminate  holding  company's  90%  $45,000 

Minority  interest                    10%  5,000M 

Surplus— Co.  A 15,000  15,000 

$110,000      $60,000      $45,000     $125,000 


COMPANY  A  AND  SUBSIDIARY  B 

Consolidated  Balance  Sheet 

(Date) 

Cash $125,000       Accounts  Payable $30,000 

Minority  Interest— Co.  B(10%).       5,000 

Capital  Stock 75,000 

Surplus 15,000 

$125,000  $125,000 


Second  illustration — Minority  interest  in  capital  stock  plus 
surplus. — In  this  illustration  it  is  assumed  that  the  subsidiary 
had  a  capital  stock  of  $50,000  and  a  surplus  of  $10,000,  making 
a  total  book  value  of  $60,000  at  the  date  when  the  holding 
company  acquired  90  per  cent  of  the  stock,  paying  book  value 
therefor,  or  $54,000.  The  subsidiary  capital  stock  and  sur- 
plus accounts  represent  capital  liabilities  to  the  holding  com- 
pany and  the  minority,  as  follows: 

Total           Inter-Co.  Minority 

(QO%)  (io%) 

Capital  Stock $50,000          $45,000  $5,000 

Plus  Surplus 10,000             9,000  1,000 

Total $60,000  $54,000  $6,000 


22  CONSOLIDATED  STATEMENTS 

In  the  following  working  papers,  90  per  cent  of  the  stock 
and  surplus  are  eliminated  as  an  inter-company  liability,  and 
the  10  per  cent  minority  interest  is  extended  to  the  consoli- 
dated balance  sheet  columns  as  an  outside  capital  liability. 

COMPANY  A  AND  SUBSIDIARY  B 

Consolidated  Balance  Sheet— Working  Papers 

AsseU  Co.  A         Co.  B         Elim.        C.  B.  S. 

Investment  in  Stock  of  Co.  B  (90%) . . .    $54,000  $54,000 

Cash 46,000       $75,000  $121,000 

$100,000       $75,000      $54,000     $121,000 

Liabilities 

Accounts  Payable $10,000       $15,000  $25,000 

Capital  Stock: 

Co.  A 75,000  75,000 

Co.  B 50,000 

Eliminate  holding  company's  90%  $45,000 

Minority  interest  10%  S,OOOM 

Surplus: 

Co.  A 15,000  15,000S 

Co.  B 10,000 

Eliminate  holding  company's  90%  9,000 

Minority  interest  10%  1,000M 

$100,000      $75,000      $54,000     $121,000 


COMPANY  A  AND  SUBSIDIARY  B 

Consolidated  Balance  Sheet 

(Date) 

Cash $121,000        Accounts  Payable $25,000 

Minority  Interest  in  Co.  B(10%) 

Capital  Stock $5,000 

Surplus 1,000        6,000 


Capital: 

Capital  Stock $75,000 

Surplus 15,000       90,000 


$121,000  $121,000 


The  minority  interest  may  be  shown  in  detail  as  to  capital 
stock  and  surplus,  as  in  the  foregoing  balance  sheet,  or  shown 
in  one  amount  as  in  the  following  balance  sheet. 


MINORITY  INTEREST  23 

COMPANY  A  AND  SUBSIDIARY  B 

Consolidated  Balance  Sheet 

(Date) 

Cash $121,000       Accounts  Payable $25,000 

Minority  Interest  in  Co.  B  (10%)         6,000 
Capital: 

Capital  Stock $75,000 

Surplus 15,000      90,000 

$121,000  $121,000 

Third  illustration — ^Minority  interest  in  capital  stock  less 
deficit. — In  this  illustration  it  is  assumed  that  the  subsidiary 
had  a  capital  stock  of  $50,000  and  a  deficit  of  $10,000,  making 
a  net  worth  of  $40,000  at  the  time  when  the  holding  company 
acquired  90  per  cent  of  its  stock,  paying  book  value  therefor, 
or  $36,000.  The  subsidiary's  capital  stock  and  deficit  accounts 
represent  capital  liabilities  to  the  holding  company  and  the 
minority  as  follows: 

Total  Inter-Co.  Minority 

(90%)  (10%) 

Capital  Stock $50,000  $45,000  $5,000 

Less  Deficit 10.000  9,000  1,000 

Net $40,000  $36.000  $4,000 

In  the  following  working  papers,  90  per  cent  of  the  sub- 
sidiary's stock  and  deficit  are  eliminated  as  an  inter-company 
liability,  and  10  per  cent  of  these  accounts  are  extended  to  the 
consolidated  balance  sheet  columns  as  an  outside  capital  lia- 
biUty. 

COMPANY  A  AND  SUBSIDIARY  B    • 
Consolidated  Balance  Sheet — Working  Papers 

Assets  Co.  A  Co.  B  Elim.        C.  B.  S. 

Investment  in  Stock  of  Co.  B  (90%) . . .  $36,000  $36,000 

Cash 64,000  $55,000  $119,000 

Deficit— Co.  B 10,000 

Eliminate  holding  company's  90%.  9,000 

Minority  interest  10%.  1,OOOM 

$100,000  $65.000  $45,000    $120,000 

Liabilities 

Accounts  Payable $10,000       $15,000  $25,000 

Capital  Stock: 

Co.  A 75,000  75,000 

Co.  B 50,000 

Eliminate  holding  company's  90%  $45,000 

Minority  interest  10%  5,000M 

Surplus— Co.  A 15,000      15,000S 

$100,000      $65,000      $45,000     $120,000 


24  CONSOLIDATED  STATEMENTS 

In  the  following  consolidated  balance  sheet,  the  minority 
interest  is  shown  as  $4,000,  which  is  their  10  per  cent  of  the 
capital  stock  minus  their  10  per  cent  of  the  deficit. 

COMPANY  A  AND  SUBSIDIARY  B 

Consolidated  Balance  Sheet 

(Date) 

Cash $119,000       Accounts  Payable $25,000 

Minority  Interest  in  Co.  B  (10%)         4,000 
Capital: 

Capital  Stock $75 ,000 

Surplus 15,000      90,000 

$119,000  $119,000 


Chapter  V 
GOODWILL 

Purchase  price  in  excess  of  book  value. — In  all  preceding 
illustrations  the  holding  company  has  paid  exactly  book 
value  for  the  subsidiary  stock.  In  this  chapter  we  shall  con- 
sider the  effect  on  the  consolidated  balance  sheet  in  case  the 
holding  company  pays  more  than  book  value. 

When  the  holding  company  pays  more  than  book  value  for 
the  subsidiary  stock,  the  balance  of  the  investment  account 
no  longer  represents  merely  the  holding  company's  interest  in 
the  subsidiary's  net  assets.  The  purchase  price  is  now  com- 
posed of  two  elements;  a  payment  equal  to  the  book  value  of 
the  interest  acquired  in  the  subsidiary's  net  assets,  and  a 
premium  paid  to  obtain  the  interest.  The  treatment  to  be 
given  to  this  premium  may  be  made  clearer  by  considering  how  a 
similar  premium  would  be  dealt  with  in  the  case  of  a  merger. 

Treatment  in  a  merger. — Let  us  assume  that  Company  B 
has  the  following  balance  sheet: 

BALANCE  SHEET-COMPANY  B 

Machinery $25,000       Accounts  Payable $15,000 

Inventory 30,000        Capital  Stock 50,000 

Cash 10,000 

$65,000  $65,000 


Company  A  has  the  following  balance  sheet: 

BALANCE  SHEET— COMPANY  A 
Cash $75,000        Capital  Stock $75,000 


Company  A  wishes  to  obtain  control  of  Company  B.  To 
do  so  it  may  adopt  either  the  merger  procedure,  purchasing 
the  assets  and  assuming  the  liabilities,  or  the  holding  company 
procedure,  purchasing  the  stock.  The  price  agreed  upon  is 
$55,000,  which  is  $5,000  in  excess  of  the  book  value  of  Com- 
pany B. 

25 


26  CONSOLIDATED  STATEMENTS 

If  the  merger  procedure  is  adopted.  Company  A*s  entries 
will  be: 

Machinery $25,000 

Inventory 30,000 

Cash 10,000 

GoodwJU 5,000 

Accounts  Payable $15,000 

Company  B,  Vendor 55,000 

To  record  the  purchase  of  the  assets  and  the  assumption 
of  the  liabilities  of  Company  B. 

Purchase  price $55,000 

Assets  per  Co.  B's  books $65,000 

Less  liabilities  assumed 15,000 


Net  assets  per  Co.  B's  books 50,000 


Excess  payment  charged  to  goodwill. .  $  5,000 


Company  B,  Vendor $55,000 

Cash $55,000 

To  record  the  payment  of  cash  for  the  net  assets  and  good- 
will of  Company  B. 

Company  A's  balance  sheet  after  the  purchase  will  be  as 

follows : 

BALANCE  SHEET-COMPANY  A 

Machinery... $25,000  Accounts  Payable $15,000 

Inventory 30,000  Capital  Stock 75,000 

Cash 30,000 

Goodwill 5,000 


$90,000  $90,000 


Treatment  in  a  holding  company. — If  the  holding  company 
procedure  is  adopted,  Company  A  will  make  the  following 
entry: 

Investment  in  Stock  of  Company  B $55,000 

Cash $55,000 

To  record  the  purchase  of  the  entire  outstanding  stock 
of  Company  B. 

Purchase  price $55,000 

Book  value  of  stock  acquired 50,000 


Payment  in  excess  of  book- value $5,000 


In  preparing  the  consolidated  balance  sheet,  the  investment 
account  is  replaced  by  the  things  which  it  represents.     When 


GOODWILL  27 

the  holding  company  pays  exactly  book  value,  the  invest- 
ment account  represents  the  net  assets  on  the  subsidiary's 
books;  when  the  holding  company  pays  more  than  book  value, 
the  investment  account  represents  two  things:  (1)  the  book 
value  of  the  subsidiary's  net  assets,  and  (2)  the  excess  payment, 
which  is  goodwill. 

Therefore,  in  the  consolidated  working  papers  that  portion 
of  the  investment  account  which  represents  subsidiary  net 
assets  is  eliminated;  and  the  portion  which  represents  excess 
payment  is  carried  out  to  the  consolidated  balance  sheet 
column,  and  appears  in  the  consolidated  balance  sheet  as 
goodwill. 

Outline  of  illustrations. — Six  illustrations  will  be  given  in 
this  chapter,  divided  into  two  groups.  In  all  of  the  illustra- 
tions the  purchase  price  will  be  in  excess  of  the  book  value  of 
the  subsidiary  stock  at  the  date  of  acquisition;  and  in  all  of 
the  illustrations  the  consolidated  balance  sheet  will  be  prepared 
at  the  date  of  acquisition. 

Group  I.   Holding  company  acquires  100  per  cent  interest. 
First  illustration:      Subsidiary  has  no  surplus  or  deficit. 
Second  illustration:  Subsidiary  has  a  surplus. 
Third  illustration:    Subsidiary  has  a  deficit. 

Group  II.   Holding  company  acquires  a  90  per  cent  interest. 
Fourth  illustration:  Subsidiary  has  no  surplus  or  deficit. 
Fifth  illustration:     Subsidiary  has  a  surplus. 
Sixth  illustration:     Subsidiary  has  a  deficit. 

In  all  of  these  illustrations  the  following  principles,  already 
explained,  will  govern  the  eliminations: 

Investment  account:  Eliminate  the  book  value  of  the  stock 
acquired,  carrying  out  any  excess  as  goodwill. 

Subsidiary  capital  stock,  surplus  and  deficit  accounts: 
Eliminate  the  holding  company's  proportion  as  an  inter-com- 
pany relation,  carrying  out  the  minority's  interest. 

First  illustration. — In  this  illustration  it  will  be  assumed  that 
at  the  date  of  acquisition  the  subsidiary  has  a  capital  stock 
of  $50,000  and  no  surplus  or  deficit.  The  holding  company 
acquires  all  of  the  stock,  paying  $57,000  therefor. 


28  CONSOLIDATED  STATEMENTS 

COMPANY  A  AND  SUBSIDIARY  B 

Consolidated  Balance  Sheet— Working  Papers 

Assets  Co.  A         Co.  B         Elim.        C.  B.  S. 

Investment  in  Stock  of  Co.  B  (100%) . .    $57,000 
Eliminate  book  value: 

Capital  stock $50,000 

Goodwill $    7,000  C 

Cash 43,000      $60,000  103,000 

$100,000      $60,000      $50,000     $110,000 

Liabiliiies 
Accounts  Payable $10,000       $10,000  $20,0CO 

Capital  Stock: 

Co.  A 75,000  75,000 

Co.  B 50,000 

Eliminate  holding  company's  100%  $50,000 

Surplus— Co.  A 15,000  15,000 

$100,000       $60,000      $50,000     $110,000 


COMPANY  A  AND  SUBSIDIARY  B 

Consolidated  Balance  Sheet 

(Date) 

Cash $103,000        Accounts  Payable S  20,000 

Goodwill 7,000        Capital  Stock 75,000 

Surplus 15,000 


$110,000  $110,000 


Second  illustration. — In  this  illustration  it  will  be  assumed 
that  at  the  date  of  acquisition,  the  subsidiary  has  a  capital 
stock  of  $50,000  and  a  surplus  of  $10,000,  making  a  total  book 
value  of  $60,000.  The  holding  company  acquires  all  of  the 
stock,  paying  $63,000  therefor. 

Assets  Co.  A         Co.  B  Elim.  C.  B.  S. 

Investment  in  Stock  of  Co.  B  (100%) . .  $  63,000 
Eliminate  book  value: 

Capital  Stock $50,000 

Surplus 10,000 

Goodwill -        $    3,000  G 

Cash 37,000      $65,000  102,000 


$100,000       $65,000       $60,000    $105,000 


GOODWILL  29 

Liabilities  Co.  A  Co.  B         Elim.        C.B.S. 

Accounts  Payable $10,000        $5,000  $15,000 

Capital  Stock: 

Co.  A 75,000  75,000 

Co.B.. 50,000 

Eliminate  holding  company's  100%  $50,000 

Surplus: 

Co.  A 15,000  15,000 

Co.B 10,000 

Eliminate  holding  company's  100%  10,000 


$100,000       $65,000      $60,000    $105,000 


COMPANY  A  AND  SUBSIDIARY  B 

Consolidated  Balance  Sheet 

(Date) 

Cash ., $102,000        Accounts  Payable $15,000 

Goodwill 3,000        Capital  Stock 75,000 

Surplus 15,000 


$105,000  $105,000 


Third  illustration. — In  this  illustration  it  will  be  assumed  that 
at  the  date  of  acquisition  the  subsidiary  has  a  capital  stock  of 
$50,000  and  a  deficit  of  $10,000,  making  the  net  book  value  of 
the  stock  $40,000.  The  holding  company  acquires  all  of  the 
stock,  paying  $42,000  therefor. 

COMPANY  A  AND  SUBSIDIARY  B 

Consolidated  Balance  Sheet — Working  Papers 

AsseU  Co.  A         Co.  B         Elim.        C.  B.  S. 

Investment  in  Stock  of  Co.  B  (100%) . .   $42,000 
Eliminate  book  value: 

Capital  Stock $50,000 

Less  Deficit 10,000* 

Goodwill $    2,00aG 

Cash 58,000      $45,000      -^  103,000 

Deficit— Co.  B 10,000 

Eliminate  holding  company's  100%  10,000 


$100,000      $55,000      $50,000     $105,000 


Liabilities 

Accounts  Payable $15,000        $5,000  $20,000 

Capital  Stock: 

Co.  A 75,000  75,000 

Co.  B 50,000 

Eliminate  holding  company's  100%  $50,000 

Surplus— Co.A 10,000  10,000 


1100,000      $55,000      $50,000     $105,000 
*Indic«Ua  a  deductkn. 


30  CONSOLIDATED  STATEMENTS 

COMPANY  A  AND  SUBSIDIARY  B 

Consolidated  Balance  Sheet 

(Date) 

Cash $103,000       Accounts  Payable $20,000 

Goodwill 2,000        Capital  Stock 75,000 

Surplus 10,000 


$105,000  $105,000 


Fourth  illustration. — In  this  illustration  it  will  be  assumed 
that  at  the  date  of  acquisition  the  subsidiary  has  a  capital  stock 
of  $50,000  and  no  surplus.  The  holding  company  acquires  a 
90  per  cent  interest,  the  book  value  of  which  is  $45,000  and  the 
purchase  price  $48,000. 

COMPANY  A  AND  SUBSIDIARY  B 

Consolidated  Balance  Sheet — ^Working  Papers 

Assets  Co.  A         Co.  B         Elim.  C.  B.  S. 

Investment  In  Stock  of  Co.  B  (90%) . . .   $48,000 

Eliminate  book  value: 
Capital  stock:  90%  of  $50,000. . .  $45,000 

Goodwill 

Cash 52,000   $65,000 


$100,000   $65,000 


Liahilities 

Accounts  Payable $10,000      $15,000 

Capital  Stock: 

Co.  A 75,000 

Co.  B.. 50,000 

Eliminate  holding  company's  90% 
Minority  interest                   10% 
Surplus— Co.  A 15,000 


$100,000      $65,000 


$  3,000'G 
117,000 

$45,000 

$120,000 

$25,000 

75,000 

$45,000 

5,00&M 
15,000  ' 

$45,000 

$120,000 

COMPANY  A  AND  SUBSIDIARY  B 

Consolidated  Balance  Sheet 

(Date) 

Cash $117,000        Accounts  Payable $25,000 

Goodwill 3,000        Minority  Interest  in  Co.  B  (10%)         5,000 

Capital  Stock 75,000 

Surplus 15,000 

$120,000  $120,000 


GOODWILL  31 

Fifth  illustration. — In  this  illustration  it  will  be  assumed  that 
at  the  date  of  acquisition  the  subsidiary  has  a  capital  stock 
of  $50,000  and  a  surplus  of  $10,000,  making  a  total  book 
value  of  $60,000.  The  holding  company  acquires  a  90  per 
cent  interest,  the  book  value  of  which  is  $54,000  and  the  pur- 
chase price  $57,000. 

COMPANY  A  AND  SUBSIDIARY  B 
Consolidated  Balance  Sheet— Working  Papers 

Assets  Co.  A         Co.  B         Elim.        C.  B.  S. 

Investment  in  Stock  of  Co.  B  (90%) . . .   $57,000 
Eliminate  book  value: 
Capital  stock:  90%  of  $50,000. . .  $45,000 

Surplus  :90%of   10,000...  9,000 

Goodwill $    3,000G 

Cash 43,000        75,000  118,000 

$100,000      $75,000      $54,000     $121,000 

Liabilities 

Accounts  Payable $10,000      $15,000  $25,000 

Capital  Stock: 

Co.  A 75,000  75,000 

Co.  B.. 50,000 

Eliminate  holding  company's  90%  $45,000 

Minority  interest  10%  5,000M 

Surplus: 

Co.  A 15,000  15,000 

Co.  B 10,000 

Eliminate  holding  company's  90%  9,000 

Minority  interest  10%  1,000M 

$100,000       $75,000      $54,000    $121,000 


COMPANY  A  AND  SUBSIDIARY  B 

Consolidated  Balance  Sheet 

(Date) 

Cash $118,000        Accounts  Payable $25,000 

Goodwill 3,000        Minority  Interest— Co.  B  (10%)  6,000 

Capital  Stock 75,000 

Surplus 15,000 

$121,000  $121,000 

Sixth  illustration. — In  this  illustration  it  will  be  assumed  that 
at  the  date  of  acquisition  the  subsidiary  has  a  capital  stock  of 


32  CONSOLIDATED  STATEMENTS 

$50,000  and  a  deficit  of  $10,000,  making  a  net  book  value 
of  $40,000.  The  holding  company  acquires  a  90  per  cent 
interest,  the  book  value  of  which  is  $36,000,  and  the  purchase 
price  $38,000. 

COMPANY  A  AND  SUBSIDIARY  B 

Consolidated  Balance  Sheet — Working  PAPERa 


Assets 

Co.  A 

Co.B 

Elim. 

C.  B.  S. 

Investment  in  Stock  of  Co.  B  (90%) . . , 

$38,000 

Eliminate  book  value: 

Capital  Stock:  90%  of  $50,000.. 
Less  Deficit:     90%  of   10,000.. 

Goodwill 

Cash 

'.     62,000 

$55,000 

$45,000 
9,000* 

$    2,000  G 
117,000 

Deficit— Co.  B 10,000 

Eliminate  holding  company's  90% .  9,000 

Minority  interest  10%.  1,000M 


$100,000      $65,000       $45,000     $120,000 


Liabilities 

Accounts  Payable $10,000      $15,000  $25,000 

Capital  Stock: 

Co.  A 75,000  75,000 

Co.B 50,000 

Eliminate  holding  company's  90%  $45,000" 

Minority  interest                    10%  5,000M 

Surplus— Co.  A 15,000  15,000 


$100,000      $65,000       $45,000     $120,000 
*  Indicates  a  deduction. 

COMPANY  A  AND  SUBSIDIARY  B 

Consolidated  Balance  Sheet 

(Date) 

Cash $117,000        Accounts  Payable $25,000 

Goodwill 2,000        Minority  Interest— Co.  B  (10%)  4,000 

Capital  Stock 75,000 

Surplus 15,000 


$119,000  $119,000 


Summary. — It  will  be  noted  that  in  all  of  these  illustrations: 

1.  The  excess  of  the  purchase  price  over  the  book  value  of 
the  acquired  stock  at  the  date  of  acquisition  appears  on 
the  consolidated  balance  sheet  as  goodwill. 


GOODWILL  33 

2.  The  minority  interest  is  its  stock  proportion  of  the  subsi- 
diary's capital  stock  plus  its  proportion  of  the  subsidiary's 
surplus  or  minus  its  proportion  of  the  subsidiary's  deficit. 

3.  The  holding  company's  surplus  at  the  date  of  acquisition 
is  not  affected  by  the  fact  that  the  subsidiary's  books 
show  either  a  surplus  or  a  deficit. 

On  the  consoHdated  balance  sheet  the  excess  of  purchase 
price  over  book  value  at  acquisition  will  not  appear  as  a  sep- 
arate item  of  goodwill,  but  will  be  added  to  any  goodwill 
accounts  on  the  books  of  the  related  companies,  the  total 
being  shown  as  one  item. 


Chapter  VI 
DEDUCTION  FROM  GOODWILL 

Book  value  in  excess  of  purchase  price. — If  the  subsidiary 
has  a  goodwill  account  at  the  date  when  the  holding  company 
acquires  its  stock  interest,  and  if  the  holding  company  pays 
less  than  book  value  for  the  stock,  the  presumption  is  that  the 
holding  company  does  not  recognize  the  goodwill  as  con- 
servatively valued  and  is  therefore  unwilling  to  pay  book  value 
for  the  stock.  Therefore,  when  the  purchase  price  is  less  than 
the  book  value  of  the  stock  as  shown  on  the  subsidiary's  books, 
the  deficiency  should  be  deducted  from  any  goodwill  appearing 
on  the  subsidiary's  books.  Only  the  net  amount  of  goodwill 
thus  ascertained  will  appear  on  the  consolidated  balance  sheet. 

Cases  may  arise  when  the  holding  company  pays  less  than 
book  value  and  there  is  no  goodwill  on  the  subsidiary's  books; 
the  consideration  of  these  cases  will  be  deferred  until  a  subse- 
quent chapter. 

Outline  of  illustrations. — Six  illustrations  will  be  given  in 
this  chapter,  divided  into  two  groups.  In  all  of  the  illustra- 
tions the  purchase  price  will  be  less  than  book  value,  there  will 
be  a  goodwill  account  on  the  subsidiary's  books,  and  the  con- 
solidated balance  sheet  will  be  prepared  at  the  date  of  ac- 
quisition. 

Group  I.   Holding  company  acquires  a  100  per  cent  interest. 
First  illustration:      subsidiary  has  no  surplus  or  deficit. 
Second  illustration:  subsidiary  has  a  surplus. 
Third  illustration:    subsidiary  has  a  deficit. 

Group  11.   Holding  company  acquires  a  90  per  cent  interest. 
Fourth  illustration:  subsidiary  has  no  surplus  or  deficit. 
Fifth  illustration:      subsidiary  has  a  surplus. 
Sixth  illustration:     subsidiary  has  a  deficit. 

In  all  of  these  illustrations,  the  principles  already  discussed 
will  govern  the  eliminations: 

Investment  account:  eliminate  the  book  value  of  the  stock 
acquired,  the  excess  of  the  book  value  eliminated   over  the 

34 


DEDUCTION  FROM  GOODWILL  35 

cost  of  the  stock  being  carried  to  the  consolidated  balance  sheet 
column  as  a  negative  figure  to  be  deducted  from  the  sub- 
sidiary's goodwill. 

Subsidiary's  capital  stock,  surplus  and  deficit  accounts: 
eliminate  the  holding  company's  proportion  as  an  inter-com- 
pany relation,  carrying  out  the  minority's  interest. 

First  illustration. — In  this  illustration  it  is  assumed  that  at 
the  date  of  acquisition  the  subsidiary  has  a  capital  stock  of 
$50,000  and  no  surplus  or  deficit.  The  holding  company 
acquires  all  of  the  stock,  paying  $49,000  therefor,  or  $1,000 
less  than  the  book  value. 

COMPANY  A  AND  SUBSIDIARY  B 
Consolidated  Balance  Sheet — Working  Papers 

Assets  Co.  A         Co.  B  Elim.         C.  B.  S. 

Investment  in  Stock  of  Co.  B  (100%).    $49,000 

Eliminate  book  value: 
Capital  Stock $50,000 

Deduction  from  goodwill $    1,000*  G 

Goodwill 3,000  3,000  G 

Cash 51,000        57,000  108,000 

$100,000       $60,000       $50,000     $110,000 

LiabUities 
Accounts  Payable $15,000       $10,000  $25,000 

Capital  Stock: 

Co.  A 75,000  75,000 

Co.  B 50,000 

Eliminate  holding  company's  100%  50,000 

Surplus— Cq.  a 10,000  10,000 

$100,000       $60,000      $50,000     $110,000 

*Indicatet  deduction. 

COMPANY  A  AND  SUBSIDIARY  B 

Consolidated  Balance  Sheet 

(Date) 

Cash $108,000        Accounts  Payable $25,000 

GoodwiU 2,000        Capital  Stock 75,000 

Surplus 10,000 

$110,000  $110,000 


36  CONSOLIDATED  STATEMENTS 

Second  illustration. — In  this  illustration  it  is  assumed  that 
at  the  date  of  acquisition  the  subsidiary  has  a  capital  stock 
of  $50,000  and  a  surplus  of  $10,000,  making  a  total  book  value 
of  $60,000.  The  holding  company  acquires  all  of  the  stock, 
paying  $59,000  therefor,  or  $1,000  less  than  book  value. 

COMPANY  A  AND  SUBSIDIARY  B 

Consolidated  Balance  Sheet — Working  Papers 

Assets  Co.  A         Co.  B         Elim.         C.  B.  S. 

Investment  in  Stock  of  Co.  B  (100%) .   $59,000 

Eliminate  book  value: 

Capital  Stock $50,000 

Surplus 10,000 

Deduction  from  goodwill $1,000*  G 

Cash 41,000      $61,000  102,000 

Goodwill 4,000  4,000  G 


$100,000      $65,000      $60,000     $105,000 


Liabilities 
Accounts  Payable $10,000        $5,000  $15,000 

Capital  Stock: 

Co.  A 75,000  75,000 

Co.  B 50,000 

Eliminate  holding  company's  100%  $50,000 

Surplus: 

Co.  A 15,000  15,000 

Co.  B 10,000 

Eliminate  holding  company's  100%  10,000 


$100,000      $65,000      $60,000     $105,000 
*  Indicates  a  deduction. 

COMPANY  A  AND  SUBSIDIARY  B 

Consolidated  Balance  Sheet 

(Date) 

Cash $102,000        Accounts  Payable $15,000 

Goodwill 3,000        Capital  Stock 75,000 

Surplus 15,000 


$105,000  $105,000 


Third  illustration. — In  this  illustration  it  is  assumed  that  at 
the  date  of  acquisition  the  subsidiary  has  a  capital  stock  of 
$50,000  and  a  deficit  of  $10,000,  making  a  net  book  value  of 


DEDUCTION  FROM  GOODWILL  37 

$40,000.     The   holding  company   acquires   all  of   the    stock, 
paying  $39,000  therefor,  which  is  $1,000  less  than  book  value. 

COMPANY  A  AND  SUBSIDIARY  B 
Consolidated  Balance  Sheet — Working  Papers 

Assets  Co.  A         Co.  B  Elim.        C.  B.  S. 

Investment  in  Stock  of  Co.  B  (100%) .    $39,000 

Eliminate  book  value: 

Capital  Stock $50,000 

Deficit 10,000* 

Deduction  from  goodwill $    1,000*G 

Cash 61,000       $42,000  103,000 

Goodwill 3,000  3,000G 

Deficit— Co.  B 10,000 

Eliminate  holding  company's  100%  10,000 


$100,000       $55,000       $50,000     $105,000 


Liabilities 
Accounts  Payable $15,000        $5,000  $20,000 

Capital  Stock: 

Co.  A 75,000  75,000 

Co.  B 50,000 

Eliminate  holding  company's  100%  $50,000 

Surplus— Co.  A 10,000  10,000 


$100,000       $55,000      $50,000     $105,000 
*  Indicates  a  deduction. 

COMPANY  A  AND  SUBSIDIARY  B 

Consolidated  Balance  Sheet 

(Date) 

Cash $103,000        Accounts  Payable $20,000 

Goodwill 2,000        Capital  Stock 75,000 

Surplus 10,000 


$105,000  $105,000 


Fourth  illustration. — In  this  illustration  it  is  assumed  that 
at  the  date  of  acquisition  the  subsidiary  has  a  capital  stock  of 
$50,000  and  no  surplus.  Its  book  value  is  therefore  $50,000. 
The  holding  company  acquires  a  90  per  cent  interest,  the  book 
value  of  which  is  $45,000.  The  purchase  price  was  $44,000, 
or  $1,000  less  than  book  value. 


f  /» 


■X'i 


38  CONSOLIDATED  STATEMENTS 

COMPANY  A  AND  SUBSIDIARY  B 
Consolidated  Balance  Sheet — Working  Papers 

Assets  Co.  A         Co.  B         Elim.        C.  B.  S. 

Investment  in  Stock  of  Co.  B  (90%) . .   $44,000 

Eliminate  book  value: 

Capital  stock:  90%  of  $50,000..  $45,000 

Deduction  from  goodwill $1,000*  G 

Cash 56,000        62,000                        118,000 

Goodwill 3,000                           3,000  G 

$100,000      $65,000      $45,000     $120,000 

Liabilities 
Accounts  Payable $10,000      $15,000  $25,000 

Capital  Stock:  ,      \   .   '__ 

Co.  A 75,000  75,000 

Co.  B 50,000 

Eliminate  holding  company's  90%  $45,000 

Minority  interest                    10%  5,000  M 

Surplus— Co.  A 15,000  15,000 

$100,000      $65,000       $45,000     $120,000 
*  Indicates  a  deduction. 

COMPANY  A  AND  SUBSIDIARY  B 

Consolidated  Balance  Sheet 

(Date) 

Cash $118,000       Accounts  Payable $25,000 

Goodwill 2,000        Minority  Interest— Co.  B  (10%)  5,000 

Capital  Stock 75,000 

Surplus 15,000 

$120,000  $120,000 


Fifth  illustration. — In  this  illustration  it  is  assumed  that  at 
the  date  of  acquisition  the  subsidiary  has  a  capital  stock  of 
$50,000  and  a  surplus  of  $10,000,  making  a  total  book  value  of 
$60,000.  The  holding  company  acquires  a  90  per  cent  in- 
terest, the  book  value  of  which  is  $54,000  and  the  purchase 
price  $53,000. 


DEDUCTION  FROM  GOODWILL  39 

COMPANY  A  AND  SUBSIDIARY  B 
Consolidated  Balance  Sheet — Working  Papers 

AsseU  Co.  A         Co.  B         Elim.         C.  B.  S. 

Investment  in  Stock  of  Co.  B  (90%) . .   $53,000 
Eliminate  book  value: 
Capital  stock :  90%  of  $50,000 . .  $45,000 

Surplus:  90%  of   10,000..  9,000 

Deduction  from  goodwill $    1,000*  G 

Cash 47,000        72,000  119,000 

Goodwill 3,000  3,000  G 


$100,000      $75,000      $54,000     $121,000 


Liahilities 

Accounts  Payable $10,000      $15,000  $25,000 

Capital  Stock: 

Co.  A 75,000  75,000 

Co.  B 50,000 

Eliminate  holding'company's  90%  $45,000 

Minority  interest  10%  5,000  M 

Surplus: 

Co.  A 15,000  15,000 

Co.  B 10,000 

Eliminate  holding  company's  90%  9,000 

Minority  interest  10%  1,000  M 


$100,000      $75,000      $54,000     $121,000 
*  Indicates  a  deduction. 

COMPANY  A  AND  SUBSIDIARY  B 

Consolidated  Balance  Sheet 

(Date) 

Cash $119,000        Accounts  Payable $25,000 

Goodwill 2,000        Minority  Interest— Co.  B  (10%)  6,000 

Capital  Stock 75,000 

Surplus. .  r 15,000 


$121,000  $121,000 


Sixth  illustration. — In  this  illustration  it  is  assumed  that  at 
the  date  of  acquisition  the  subsidiary  has  a  capital  stock  of 
$50,000  and  a  deficit  of  $10,000,  making  a  net  book  value  of 
$40,000.  The  holding  company  acquires  a  90  per  cent  in- 
terest, the  book  value  of  which  is  $36,000  and  the  purchase 
price  $35,000. 


40  CONSOLIDATED  STATEMENTS 

COMPANY  A  AND  SUBSIDIARY  B  ' 

CoNSOtlDATED  BALANCE   ShEET — WoRKING  PaPERS 

AsseU  Co.  A         Co.  B  Elim.         C.  B.  S. 

Investment  in  Stock  of  Co.  B  (90%) . . .  $35,000 
Eliminate  book  value:.. 
Capital  Stock:  90%  of  $50,000.,  $45,000 

Deficit:  90%  of   10,000..  9,000* 

Deduction  from  goodwill $    1,000*  G 

Cash 65,000      $52,000  117,000 

Goodwill 3,000  3,000  G 

Deficit— Co.  B 10,000 

Eliminate  holding  company's  90%  9,000 

Minority  interest  10%  1,000  M 


$100,000       $65,000      $45,000     $120,000 


Liabilities 

Accounts  Payable $10,000       $15,000  $25,000 

Capital  Stock: 

Co.A 75,000  75,000 

Co.  B 50,000 

Eliminate  holding  company's  90%  ^  $45,000 

Minority  interest                    10%  5,000  M 

Surplus— Co.  A 15,000  15,000 


$100,000      $65,000      $45,000     $120,000 

*  Indicates  a  deduction. 

\ 
COMPANY  A  AND  SUBSIDIARY  B 

Consolidated  Balance  Sheet 

(Date) 

Cash $117,000        Accounts  Payable $25,000 

Goodwill 2,000        Minority  Interest— Co.  B  (10%)  4,000 

Capital  Stock 75,000 

Surplus 15,000 


$119,000  $119,000 


Summary  of  the  first  six  chapters. — In  all  of  the  illustra- 
tions thus  far  presented  the  consolidated  balance  sheet  has 
been  prepared  at  the  date  of  acquisition,  and  the  following 
principles  and  procedure  have  been  found  to  apply: 

1.  All  similar  assets  and  liabilities  are  combined. 

2.  The  investment  account  is  not  shown  in  the  consolidated 
balance  sheet;  the  book  value  of  the  subsidiary  stock  is 


DEDUCTION  FROM  GOODWILL  41 

eliminated;  any  excess  of  purchase  price  over  book  value 
is  carried  to  the  consolidated  balance  sheet  as  goodwill; 
any  excess  of  the  book  value  over  the  purchase  price  is 
deducted  from  the  goodwill  on  the  subsidiary's  books. 
3.  The  subsidiary's  capital  stock,  surplus  and  deficit  ac- 
counts are  entirely  eliminated  if  the  holding  company 
owns  all  of  the  subsidiary  stock;  if  it  owns  only  a  con- 
trolling interest  each  of  these  accounts  is  divided  into  two 
parts:  (a)  the  holding  company's  proportion,  which  is 
eliminated;  and  (b)  the  minority's  interest,  which  is 
shown  on  the  consolidated  balance  sheet. 

In  later  chapters  we  shall  consider  the  procedure  of  making 
eliminations  when  the  consolidated  balance  sheet  is  prepared 
at  a  date  subsequent  to  the  date  of  acquisition,  after  the  sub- 
sidiary has  made  profits  or  losses  and  paid  dividends.  Be- 
fore considering  these  cases,  however,  it  is  necessary  to  de- 
scribe the  approved  method  for  the  holding  company  to  record 
its  share  of  subsidiary  profits,  losses  and  dividends.  This  will 
be  done  in  the  next  chapter. 


Chapter  VII 

SUBSIDIARY'S  PROFITS,  LOSSES  AND  DIVIDENDS 
ON  THE  HOLDING  COMPANY'S  BOOKS 

Subsidiary  profits. — If  the  subsidiary  makes  a  profit  after 
the  holding  company  acquires  its  stock,  this  profit  increases 
the  net  assets  of  the  subsidiary  and  correspondingly  increases 
the  value  of  the  stock  owned  by  the  holding  company.  Hence, 
after  the  subsidiary  has  closed  its  books  and  ascertained  its 
profits,  the  holding  company  should  take  up  its  share  of  these 
profits  by  debiting  the  investment  account  and  crediting  an 
account  with  some  title  such  as  Income  from  Subsidiary. 
This  account  is  closed  into  Profit  and  Loss  or  Surplus.  It 
will  be  noted  that  the  holding  company  takes  up  its  share  of 
the  profits  and  increases  its  investment  account  as  soon  as  the 
subsidiary  ascertains  its  profits;  this  practice  is  justified  be- 
cause the  two  companies  are  so  closely  related  that  the  profits 
of  the  subsidiary  are  virtually  profits  of  the  holding  company 
which  owns  the  subsidiary. 

Subsidiary  losses. — If  the  subsidiary  suffers  a  loss,  the  hold- 
ing company  should  debit  Loss  from  Subsidiary  to  take  up 
its  share  of  the  loss,  and  credit  the  investment  account  to  show 
the  reduction  in  the  value  of  the  stockholdings  in  the  sub- 
sidiary. 

Subsidiary  dividends. — When  the  subsidiary  declares  a 
dividend,  the  holding  company  should  debit  Dividends  Re- 
ceivable and  credit  the  investment  account.  Since  the  hold- 
ing company  took  up  the  profits  of  the  subsidiary  as  income, 
the  dividends  do  not  constitute  additional  income  but  are 
a  conversion  of  the  asset  of  stock  investment  into  a  current 
asset  of  dividends  receivable. 

In  other  words,  profits  earned  by  the  subsidiary  increase  the 
value  of  the  subsidiary  stock,  and  hence  are  added  to  the  in- 
vestment account  by  a  debit  entry;  dividends  decrease  the 
net  assets  of  the  subsidiary  and  hence  are  deducted  from  the 
investment  account  by  a  credit  entry. 

42 


PROFITS,  LOSSES  AND  DIVIDENDS  43 

When  the  subsidiary  pays  the  dividend,  the  holding  com- 
pany should  debit  Cash  and  credit  Dividends  Receivable. 

If  at  the  time  of  the  acquisition  of  the  stock,  a  dividend  has 
been  declared  by  the  subsidiary  but  has  not  been  paid,  and  if 
the  right  to  receive  the  dividend  passes  to  the  holding  com- 
pany, the  holding  company  should  record  the  transaction  by 
a  debit  to  Dividends  Receivable  for  the  amount  of  the  divi- 
dend, and  a  debit  to  Investment  in  Stock  for  the  remainder 
of  the  purchase  price. 

Illustrative  journal  entries. — ^The  proper  method  of  taking 
up  subsidiary  profits,  losses  and  dividends  may  be  illustrated 
by  the  following  example.  Company  A  acquired  the  entire 
issue  of  the  stock  of  Company  B.  At  the  date  of  acquisition 
Company  B  had  a  capital  stock  of  $100,000  and  a  surplus  of 
$50,000.    The  holding  company  paid  $150,000  for  the  stock. 

Investment  in  Stock  of  Company  B $150,000 

Cash $150,000 

To  record  the  purchase  of  the  entire  issue  of  Company 
B's  stock. 

Immediately  after  the  holding  company  acquired  the  -stock, 
the  subsidiary  declared  a  10  per  cent  dividend.  This  dividend 
was  not  income  to  the  holding  company;  the  holding  company 
virtually  purchased  the  net  assets  of  the  subsidiary  when  it 
acquired  the  stock,  and  the  dividend  merely  transfers  a  portion 
of  these  assets  to  the  holding  company.  The  dividend  was  a 
conversion  of  a  portion  of  the  permanent  investment  into  a 
current  asset. 

Dividends  Receivable $10,000 

Investment  in  Stock  of  Company  B $10,000 

To  record  the  declaration  of  a  dividend  by  Company 
B,  payable  on  (date). 

At  a  later  date  the  subsidiary  paid  the  dividend,  and  the 
holding  company's  asset  of  dividends  receivable  was  converted 
into  cash. 

Cash $10,000 

Dividends  Receivable $10,000 

To  record  the  collection  of  the  dividend  from  Company  B. 

During  the  first  year  following  the  acquisition  of  the  stock, 
the  subsidiary  made  a  profit  of  $25,000.     This  was  virtually  an 


44  CONSOLIDATED  STATEMENTS 

earning  for  the  holding  company,  and  it  resulted  in  a  $25,000 
increase  in  the  value  of  the  subsidiary  stock. 

Investment  in  Stock  of  Company  B $25,000 

Income  from  Company  B $25,000 

To  take  up  our  profits  arising  from  the  operations  of 
subsidiary  Company  B. 

The  subsidiary  then  declared  and  immediately  paid  a  divi- 
dend of  $5,000.  Although  this  dividend  may  have  been  paid 
from  profits  earned  since  the  holding  company  acquired  control 
of  the  stock,  the  dividend  should  not  be  treated  as  income  be- 
cause the  holding  company  has  already  taken  up  the  income 
for  the  year.  Since  the  dividend  was  paid  immediately  upon 
declaration,  it  need  not  be  passed  through  a  Dividends  Re- 
ceivable account  but  may  be  recorded  as  follows: 

Cash $5,000 

Investment  in  Stock  of  Company  B $5,000 

To  record  collection  of  a  dividend  from  Company  B. 

During  the  second  year  the  subsidiary  lost  $20,000,  thus 
decreasing  its  net  assets  and  the  value  of  the  stock  owned  by 
the  parent  company.  The  parent  company  should  take  up 
the  loss  by  the  following  entry: 

Loss  of  Subsidiary  B $20,000 

Investment  in  Stock  of  Company  B $20,000 

To  take  up  the  loss  resulting  from  the  year's  operations 
of  subsidiary  Company  B. 

Balance  of  the  investment  accoimt. — ^When  the  holding 
company  records  its  share  of  subsidiary  profits,  losses  and 
dividends  in  the  manner  just  described,  the  balance  of  the 
investment  account  will  show  at  the  close  of  each  successive 
fiscal  period: 

1.  The  book  value  of  the  subsidiary  stockholdings  at  that 
date, 

2.  Plus  any  goodwill  involved  in  the  purchase,  due  to  the 
fact  that  the  purchase  price  was  in  excess  of  the  book 
value  of  the  acquired  stock  at  the  date  of  acquisition, 

3.  Or  minus  any  negative  goodwill  involved  in  the  purchase, 
due  to  the  fact  that  the  purchase  price  was  less  than  the 
book  value  of  the  acquired  stock  at  the  date  of  acquisition. 

This  fact  will  be  demonstrated  by  a  number  of  illustrations. 


PROFITS,  LOSSES  AND  DIVIDENDS  45 

First  illustration. — This  illustration  is  based  on  the  journal 
entries  shown  in  the  preceding  sections  of  this  chapter.  The 
account  with  the  investment  on  Company  A's  books  will  ap- 
pear as  follows: 

INVESTMENT  IN  STOCK  OF  COMPANY  B 

Cost $150,000        Dividends $10,000 

Profits— First  year 25,000        Dividends 5,000 

Loss — Second  year 20,000 

The  balance  of  the  account  is  $140,000. 

The  subsidiary's  surplus  at  this  date  is: 

Opening  balance $50,000 

Minus  first  dividend 10,000 

$40,000 
Plus  first  year's  profits 25,000 

$65,000 
Minus  second  dividend 5,000 

$60,000 
Minus  second  year's  loss 20,000 

Present  surplus $40,000 

Hence  the  present  book  value  of  the  subsidiary  is  $140,000. 
Thus  the  balance  of  the  investment  account  at  this  date  is 
equal  to  the  book  value  of  the  stock  held;  there  is  no  goodwill 
nor  negative  goodwill,  for  the  holding  company  paid  exactly 
book  value. 

Second  illustration. — ^The  subsidiary  Company  B  has  a 
capital  stock  of  $100,000  and  at  the  date  when  the  holding 
company  acquired  its  stock  the  subsidiary  had  a  surplus  of 
$50,000.  The  holding  company  purchased  a  90  per  cent  in- 
terest, which  had  a  book  value  of  90  per  cent  of  $150,000,  or 
$135,000.  The  price  paid  was  $138,000;  hence  there  was  a 
$3,000  goodwill  element  in  the  stock  purchase.  During  the 
first  two  years  after  the  holding  company  acquired  the  stock 
the  subsidiary's  surplus  account  exhibited  the  following 
changes: 

Debits       Credits 

Balance  at  date  of  holding  company's  acquisition $50,000" 

Profits— first  year 10,000 

Dividend — first  year $  6,000 

Loss — second  year 3,000 

Balance  at  the  present  date 51,000 

$60,000     $60,000 


46  CONSOLIDATED  STATEMENTS 

r 

The  subsidiary's  book  value  is  now  $151,000,  and  90  per  cent 
thereof  is  $135,900. 

The  investment  account  on  the  holding  company's  books  will 
appear  as  follows: 

INVESTMENT  IN  STOCK  OF  COMPANY  B 

Cost $138,000        Dividend— first  year $    5,400 

Profits — first  year 9,000        Loss — second  year 2,700 

Balance  at  present  date . .       138,900 


$147,000  $147,000 

This  balance  of ". $138,900  ' 

Represents : 

The  present  book  value  of  90%  of  the  subsidiary  stock     135,900 
and  the  goodwill  (as  computed  above) $3,000 

Third  illustration. — ^The  subsidiary  Company  B  has  a  capital 
stock  of  $100,000,  and  at  the  date  when  the  holding  company 
acquired  its  stock  it  had  a  deficit  of  $15,000.  The  holding 
company  purchased  a  90  per  cent  interest,  which  had  a  book 
value  of  90  per  cent  of  $85,000,  or  $76,500.  The  price  paid 
was  $73,000;  hence  there  was  a  negative  goodwill  of  $3,500 
in  the  stock  purchase.  During  the  first  two  years  after  the 
holding  company  acquired  its  stock,  the  subsidiary's  surplus 
account  exhibited  changes  as  follows: 

Debits       Credits 

Balance  at  date  of  holding  company's  acquisition $15,000 

Profits— first  year $35,000 

Dividends — first  year 5,000 

Loss — second  year 3,000 

Balance  at  the  present  date 12,000 

$35,000     $35,000 


The  subsidiary's  book  value  is  now  $112,000,  and  90  per  cent 
thereof  is  $100,800.  The  investment  account  on  the  holding 
company's  books  will  appear  as  follows: 

INVESTMENT  IN  STOCK  OF  COMPANY  B 

Cost , $73,000        Dividends— first  year $    4,500 

Profits — first  year 31,500        Loss — second  year 2,700 

Balance  at  the  present  date      97,300 


$104,500  $104,500 


This  balance  of $97,300 

Represents : 

The  present  book  value  of  90%  of  the  subsidiary  stock.      $100,800 
Minus  the  negative  goodwill  (as  computed  above) . .  3,500 

$97,300 


Chapter  VIII 
BALANCE  SHEETS  AFTER  DATE  OF  ACQUISITION 

Function  of  working  papers. — Consolidated  balance  sheet 
working  papers  are  prepared  in  order  to  accomplish  the  fol- 
lowing objects : 

1.  Combine  the  assets  and  liabilities  of  a  similar  nature. 

2.  Determine  any  goodwill  or  negative  goodwill  involved  in 
the  stock  purchase. 

3.  Ascertain  the  minority  interest  in  the  stock  and  surplus 
of  the  subsidiary. 

4.  Show  the  capital  stock  and  surplus  of  the  holding  com- 
pany. 

The  preceding  chapters  have  shown  how  these  objects  are 
accompHshed  when  the  consolidated  balance  sheet  is  prepared 
at  the  date  of  acquisition.  It  is  the  purpose  of  this  chapter  to 
show  how  the  necessary  facts  are  ascertained  when  the  balance 
sheet  is  prepared  at  a  date  subsequent  to  acquisition,  and  when 
the  holding  company  carries  its  investment  account  in  the 
manner  described  in  the  preceding  chapter. 

The  assets  and  liabilities  of  a  similar  nature  are  combined 
in  the  manner  already  described,  regardless  of  the  date  of  the 
balance  sheet,  and  this  subject  requires  no  further  discussion. 

Goodwill  or  negative  goodwill. — In  the  preceding  chapter 
it  was  shown  that  when  the  holding  company  follows  the  ap- 
proved method  of  accounting,  the  investment  account  at  any 
date  has  a  balance  equal  to  the  book  value  of  the  stock  held, 
plus  any  goodwill  or  minus  any  negative  goodwill  arising  from 
the  stock  purchase.  Therefore  the  goodwill  element  can  be 
ascertained  by  eliminating  the  book  value  of  the  subsidiary 
holdings  at  the  date  of  the  balance  sheet;  a  positive  remainder 
is  an  addition  to  the  goodwill,  and  a  negative  remainder  is  a 
deduction  from  the  goodwill. 

Minority  interest. — ^The  minority  interest  is  its  stock  pro- 
portion of  the  subsidiary's  capital  stock  and  surplus  at  the  date 
of  the  balance  sheet.  This  interest  is  ascertained  by  elimi- 
nating the  holding  company's  proportion  of  these  accounts,  and 

47 


48  CONSOLIDATED  STATEMENTS 

carrying  out  the  minority's  interest.  The  reader  is  already 
famiHar  with  this  procedure. 

Holding  company's  capital  stock  and  surplus. — The  entire 
outstanding  capital  stock  of  the  holding  company  as  well  as 
its  surplus  is  carried  to  the  consolidated  balance  sheet.  This 
surplus  account  contains  not  only  the  gains  and  losses  arising 
from  the  holding  company's  own  operations,  but  also  the  pro- 
portion of  the  subsidiary's  gains  and  losses  accruing  to  the  hold- 
ing company.  If  the  investment  account  has  been  carried  in 
the  approved  manner,  these  gains  and  losses  have  been  taken 
up  on  the  holding  company's  books. 

Simimaiy  of  eliminations. — From  the  preceding  paragraphs 
it  will  be  noted  that  the  following  eliminations  are  made: 

On  the  asset  side: — From  the  investment  account:  eliminate 
the  present  book  value  of  the  stock  held,  represented  by  the 
par  of  the  stock  and  the  proportion  of  subsidiary  surplus  ap- 
plicable thereto.  A  positive  remainder  is  goodwill;  a  negative 
remainder  is  a  deduction  from  goodwill. 

On  the  liability  side: — From  the  subsidiary  capital  stock: 
eliminate  the  par  of  the  stock  held  by  the  parent  company, 
carrying  out  the  remainder  as  minority  interest. 

From  the  subsidiary  surplus:  eliminate  the  surplus  applicable 
to  the  stock  owned  by  the  parent  company,  carrying  out  the 
remainder  as  minority  interest. 

Outline  of  illustrations. — Nine  illustrations  will  be  given  in 
this  chapter,  designed  to  show  the  method  of  preparing  con- 
solidated balance  sheet  working  papers  under  a  variety  of 
conditions.    They  will  be  divided  into  three  groups,  as  follows : 

First  group:  100  per  cent  interest;  no  goodwill;  no  subsidiary 
surplus  at  date  of  acquisition. 

First  illustration:  at  date  of  acquisition;  no  subsidiary 

surplus. 
Second  illustration:  at  end  of  first  year;  subsidiary  surplus. 
Third  illustration:  at  end  of  two  years;  subsidiary  deficit. 

Second  Group:  90  per  cent  interest;  goodwill;  subsidiary 
surplus  at  acquisition. 

Fourth  illustration:    at  date    of   acquisition;   subsidiary 

surplus. 
Fifth  illustration :  at  end  of  one  year;  subsidiary  surplus 

increased. 
Sixth  illustration:  at  end  of  two  years;  subsidiary  deficit. 


BALANCE  SHEETS  AFTER  ACQUISITION       49 

Third  Group:  90  per  cent  interest;  negative  goodwill;  sub- 
sidiary deficit  at  acquisition. 

Seventh  illustration:   at   date   of  acquisition;  subsidiary 

deficit. 
Eighth  illustration:  at  end  of  one  year;  subsidiary  deficit 

increased. 
Ninth  illustration:  at  end  of  two  years;  subsidiary  surplus. 

The  sundry  assets  and  Habilities  will  be  omitted,  as  they  are 
not  essential  to  show  the  method  of  making  eliminations  of 
inter-company  accounts. 

In  all  of  the  illustrations  it  will  be  assumed  that  the  holding 
company  made  no  profits  or  losses  other  than  those  accruing 
from  its  ownership  of  the  subsidiary  stock. 

First  illustration. — Working  papers  prepared  at  the  date  of 
acquisition. 

Assets  Co.  A         Co.  B         Elim.        C.  B.  S. 

Investment  in  Stock  of  Co.  B  (100%) . .   $50,000 

Eliminate  present  book  value: 
Capital  stock $50,000 

Liabilities 
Capital  Stock: 

Co.  A $75,000  $75,000 

Co.  B $50,000 

Eliminate  holding  company's  100%  $50,000 

Surplus:— Co.  A 15,000  15,000 

Second  illustration. — During  the  year  the  subsidiary  has 
made  a  profit  of  $12,000,  and  hence  it  has  a  surplus  of  that 
amount.  The  holding  company  has  taken  up  this  profit, 
thus  raising  its  investment  account  to  $62,000  and  its  surplus 
to  $27,000. 

Assets  Co.  A         Co.  B         Elim.        C.  B.  S. 

Investment  in  Stock  of  Co.  B  (100%) . .   $62,000 

Eliminate  present  book  value: 

Capital  Stock $50,000 

Surplus 12,000 

Liabilities 
Capital  Stock: 

Co.  A $75,000  $75,000 

Co.  B $50,000 

Eliminate  holding  company's  100%  $50,000 

Surplus: 

Co.  A 27,000  27,000 

Co.  B 12,000 

Eliminate  holding  company's  100%  12,000 


50  CONSOLIDATED  STATEMENTS 

Third  illustration. — During  the  second  year  the  subsidiary 
lost  $18,000,  thus  wiping  out  its  surplus  and  leaving  it  with 
a  deficit  of  $6,000.  The  holding  company  took  up  the  loss, 
reducing  its  investment  account  to  $44,000,  and  its  surplus  to 
$9,000. 

Assets  Co.  A         Co.  B         Elim.       C.  B.  S. 

Investment  in  Stock  of  Co.  B  (100%) . ,   $44,000 
Eliminate  present  book  value: 

Capital  Stock $50,000 

Deficit 6,000* 

Deficit— Co.  B $6,000 

Eliminate  holding  company's  100%  6,000 

Liabilities 
Capital  Stock: 

Co.  A $75,000  $75,000 

Co.  B $50,000 

Eliminate  holding  company's  100%  $50,000 

Surplus— Co.A 9,000  9,000 

Fourth  illustration. — ^The  subsidiary  had  a  capital  stock  of 
$50,000  and  a  surplus  of  $10,000  at  the  date  when  the  holding 
company  acquired  its  stock.  The  holding  company  purchased 
90  per  cent  of  the  stock,  the  book  value  of  which  was  $54,000, 
and  the  purchase  price  $56,000.  The  working  papers  are  pre- 
pared at  the  date  of  acquisition. 

Assets  Co.  A         Co.  B         Elim.        C.  B.  S. 

Investment  in  Stock  of  Co.  B  (90%) . .   $56,000 
Eliminate  present  book  value: 
Capital  stock :  90%  of  50,000 ....  $45,000 

Surplus:           90%  of  10,000. . . .  9,000 

Goodwill $2,000  G 

Liabilities 
Capital  Stock: 

Co.A $75,000  $75,000 

Co.  B $50,000 

Eliminate  holding  company's  90%  $45,000 

Minority  interest  10%  5,000M 

Surplus: 

Co.A 15,000  15,000 

Co.  B 10,000 

Eliminate  holding  company's  90%  9,000 

Minority  interest  10%  1,000M 

Fifth  illustration. — During  the  first  year  the  subsidiary 
made  a  profit  of  $4,000,  thus  increasing  its  surplus  to  $14,000. 
The  holding  company  took  up  its  90  per  cent  of  this  profit, 


BALANCE  SHEETS  AFTER  ACQUISITION       51 

or  $3,600,  thus  increasing  its  investment  account  to  $59,600 
and  its  surplus  to  $18,600. 

Assets  Co.  A         Co.  B         Elim.        C.  B.  S. 

Investment  in  Stock  of  Co.  B  (90%). . .    $59,600 
Eliminate  present  book  value: 
Capital  stock:  90%  of  50,000. . . .  $45,000 

Surplus:           90%  of  14,000. .. .  12,600 

Goodwill $2,000G 

Liabilities 
Capital  Stock: 

Co.  A $75,000  $75,000 

Co.  B $50,000 

Eliminate  holding  company's  90%  $45,000 

Minority  interest  10%  S,000M 

Surplus: 

Co.  A 18,600  18,600 

Co.  B 14,000 

Eliminate  holding  company's  90%  12,600 

Minority  interest  10%  1,400M 

Sixth  illustration. — During  the  second  year  the  subsidiary  lost 
$16,000,  wiping  out  its  surplus  account  and  leaving  it  with  a 
deficit  of  $2,000.  The  holding  company  took  up  90  per  cent 
of  this  loss,  or  $14,400,  thus  reducing  its  investment  account 
to  $45,200  and  its  surplus  to  $4,200. 

Assets  Co.  A         Co.B         Elim.        C.  B.  S. 

Investment  in  Stock  of  Co.  B  (90%) . . .   $45,200 
Eliminate  present  book  value: 
Capital  stock:  90%  of  50,000. . . .  $45,000 

Deficit:  90%  of  2,000....  1,800* 

Goodwill $2,000G 

Deficit  Co.  B $2,000 

Eliminate  holding  company's  90%  1,800 

Minority  interest  10%  200M 

Liabilities 
Capital  Stock: 

Co.  A $75,000  $75,000 

Co.B $50,000 

Eliminate  holding  company's  90%  $45,000 

Minority  interest                   10%  5,000M 

Surplus— Co.  A 4,200  4,200 

Seventh  illustration. — ^The  subsidiary  had  a  capital  stock  of 
$50,000  and  a  deficit  of  $10,000  at  the  date  when  the  holding 
company    acquired    its    stock.     The    holding   company   pur- 


52  CONSOLIDATED  STATEMENTS 

chafed  90  per  cent  of  the  stock,  the  book  value  of  which  was 
$36,000  and  the  purchase  price  $34,000.  The  working  papers 
are  prepared  at  the  date  of  acquisition. 

Assets  Co.  A         Co.  B         Elim.        C.  B.  S. 

Investment  in  Stock  of  Co.  B  (90%) . . .    $34,000 
Eliminate  present  book  value: 
Capital  stock :  90%  of  50,000 ....  $45,000 

Deficit:  90%  of  10,000... .  9,000* 

Deduction  from  goodwill $2,000*G 

Deficit— Co.  B $10,000 

Eliminate  holding  company's  90%  9,000 

Minority  interest  10%  1,000  M 

Liabilities 
Capital  Stock: 

Co.  A $75,000  $75,000 

Co.  B $50,000 

Eilminate  holding  company's  90%  $45,000 

Minority  interest                    10%  5,000  M 

Surplus— Co.  A 2,000  2,000 

Eighth  illustration. — During  the  first  year  the  subsidiary  lost 
$5,000,  thus  increasing  its  deficit  to  $15,000.  The  holding 
company  took  up  90  per  cent  of  this  loss,  or  $4,500,  thereby 
reducing  its  investment  account  to  $29,500,  and  changing  its 
surplus  of  $2,000  into  a  deficit  of  $2,500. 

Assets  Co.  A         Co.  B         Elim.        C.  B.  S. 

Investment  in  Stock  of  Co.  B  (90%) . . .    $29,500 
Eliminate  present  book  value: 
Capital  stock:  90%  of  $50,000. . .  $45,000 

Deficit:            90%  of   15,000...  13,500* 

Deduction  from  goodwill $2,000*G 

Deficit: 

Co.  A 2,500  2,500 

Co.  B $15,000 

Eliminate  holding  company's  90%  13,500 

Minority  interest  10%  1,500M 

Liabilities 
Capital  Stock 

Co.  A $75,000  $75,000 

Co.  B $50,000 

Eliminate  holding  company's  90%  $45,000 

Minority  interest  10%  5,000M 

Ninth  illustration. — During  the  second  year  the  subsidiary 
made  a  profit  of  $30,000  and  paid  a  dividend  of  $5,000,  thereby 
causing  a  net  increase  of  $25,000  in  its  surplus,  changing  its 


BALANCE  SHEETS  AFTER  ACQUISITION       53 

$15,000  deficit  into  a  $10,000  surplus.  The  holding  company 
took  up  its  90  per  cent  of  the  profits  and  its  90  per  cent  of  the 
dividends,  with  the  following  results: 

InPfstment 

Account  Surplus 

Balances  at  end  of  first  year  (as  above) $29,500  $  2,500* 

Add  profits— 90%  of  $30,000 27,000  27,000 


Balances  after  adding  profits 56,500         24,500 

Deduct  dividend— 90%  of  $5,000 4,500 


Balances  at  end  of  year 52,000        24,500 

Assets  Co.  A         Co.  B  Elim.        C.  B.  S. 

Investment  in  Stock  of  Co.  B  (90%). .    $52,000 
Eliminate  present  book  value: 
Capital  Stock  90%  of  50,000. .  45,000 

Surplus            90%  of   10,000..  9,000 

Deduction  from  goodwill $2,000*  G 


Liabilities 
Capital  Stock: 

Co.  A $75,000  $75,000 

Co.  B $50,000 

Eliminate  holding  company's  90%  $45,000 

Minority  interest  10%  5,000  M 

Surplus: 

Co.  A 24,500  •  24^00 

Co.B 10,000 

Eliminate  holding  company's  90%  9,000 

Minority  interest  10%  1,000  M 

Summary  of  illustrations. — In  the  next  chapter  the  illustra- 
tions will  be  based  on  the  same  assumed  facts  as  those  in  this 
chapter,  and  the  reader  will  have  occasion  to  refer  to  the 
results  obtained  in  this  chapter.  These  results  are  therefore 
summarized  here  to  facilitate  reference. 

Holding  Minority  Interest 

Goodwill  Company  Capital  Surplus  Total 

Surplus  Stock  or  Deficit*  or  Net 

First  Group: 

First  illustration 0  $15,000  0  0  0 

Second  illustration 0  27,000  0  0  0 

Third  illustration 0  9,000  0  0  0 

Second  Group: 

Fourth  illustration $2,000  15,000  $5,000  $1,000  $6,000 

Fifth  illustration 2,000  18,600  5,000  1,400  6,400 

Sixth  illustration 2,000  4,200  5,000  200*  4,800 

Third  Group: 

Seventh  illustration 2,000*  2,000  5,000  1,000*  4,000 

Eighth  illustration 2,000*  2,500*  5,000  1,500*  3,500 

Ninth  illustration 2,000*  24,500  5,000  1,000  6,000 


Chapter  IX 

BALANCE  SHEETS  AFTER  DATE  OF  ACQUISITION 

Continued 

Investment  Account  Carried  at  Cost 

Determining  the  goodwill. — ^The  reader  is  already  familiar 
with  the  principle  that  the  goodwill  element  is  the  difference 
between  the  book  value  of  the  stock  at  the  date  of  acquisition 
and  the  purchase  price.  When  the  investment  account  is 
carried  continuously  at  cost,  without  entries  for  subsidiary 
profits,  losses  and  dividends,  the  balance  of  the  account 
represents : 

1.  The  book  value  at  the  date  of  acquisition, 

2.  Plus  any  goodwill  due  to  the  fact  that  the  purchase  price 
was  in  excess  of  book  value, 

3.  Or  minus  any  negative  goodwill  due  to  the  fact  that  the 
purchase  price  was  less  than  book  value. 

Therefore,  when  the  investment  account  is  carried  at  cost, 
the  goodwill  element  is  ascertained  by  eliminating  the  book 
value  of  the  stock  at  the  date  of  acquisition;  a  positive  re- 
mainder is  an  addition  to  goodwill,  and  a  negative  remainder 
is  a  deduction  from  goodwill. 

Minority  interest. — The  minority  interest  is  always  the 
minority's  stock  proportion  of  the  capital  stock  and  surplus 
of  the  subsidiary  at  the  date  of  the  balance  sheet.  The 
method  used  by  the  holding  company  in  carrying  its  invest- 
ment account  has  no  bearing  whatever  on  the  computation  of 
the  minority  interest. 

Holding  company  surplus. — ^When  the  holding  company 
takes  up  the  profits  and  losses  of  the  subsidiary  in  the  manner 
described  in  Chapter  VII,  the  holding  company's  surplus  ac- 
count reflects  its  portion  of  the  subsidiary's  net  gain  or  loss 
after  the  date  of  acquisition.     If  the  holding  company  does 

54 


BALANCE  SHEETS  AFTER  ACQUISITION       55 

not  take  up  gains  and  losses  in  this  manner,  its  surplus  account 
does  not  reflect  its  portion  of  the  net  increase  or  decrease  in 
subsidiary  surplus  after  the  date  of  acquisition.  Therefore 
the  holding  company's  surplus  appearing  on  the  consolidated 
balance  sheet  must  be  computed  as  follows: 

1.  The  holding  company's  own  surplus  account, 

2.  Plus  its  proportion  of  the  net  increase  in  the  subsidiary's 
surplus  since  the  date  of  acquisition, 

3.  Or  minus  its  proportion  of  the  net  decrease  in  the  sub- 
sidiary's surplus  since  the  date  of  acquisition. 

Summary  of  eliminations. — From  the  foregoing  discussion  it 
will  be  apparent  that  when  the  holding  company  carries  the 
investment  account  at  cost,  the  book  value  of  the  subsidiary 
stock  at  the  date  of  acquisition  is  eliminated,  instead  of  the 
book  value  at  the  date  of  the  consoHdated  balance  sheet,  as 
was  done  in  the  preceding  chapter.  The  eHminations  may  be 
summarized  as  follows: 

On  the  asset  side:— Yxom  the  investment  account:  eliminate 
the  book  value  of  the  subsidiary  stock  at  the  date  of  acquisition, 
represented  by  the  par  of  the  stock  held  and  the  proportion 
of  the  subsidiary's  surplus  or  deficit  at  that  date  applicable  to 
the  holding  company.  A  positive  remainder  is  an  addition 
to  goodwill;  a  negative  remainder  is  a  deduction  from  goodwill. 

On  the  liability  side:— From  the  subsidiary  capital  stock: 
eliminate  the  par  of  the  stock  held  by  the  parent  company, 
carrying  out  the  remainder  as  minority  interest. 

From  the  subsidiary  surplus  or  deficit:  eUminate  the  holding 
company's  proportion  thereof  at  the  date  of  acquisition; 
carry  out  the  minority's  proportion  of  the  present  surplus  or 
deficit;  and  carry  out  the  holding  company's  proportion  of  the 
net  increase  or  decrease  in  the  account  since  the  date  of  ac- 
quisition, this  latter  item  being  combined  with  the  holdmg 
company's  surplus  account  to  obtain  the  total  or  net  surplus 
on  the  consolidated  balance  sheet. 

Outline  of  illustrations.— The  nine  illustrations  in  the  pre- 
ceding chapter  will  be  repeated  in  this  chapter,  the  only  change 
being  the  fact  that  the  holding  company  carries  the  investment 
account  at  cost.  After  each  illustration  is  completed,  the 
reader  should  refer  to  the  summary  at  the  close  of  Chapter 
VIII  and  note  that  the  same  results  are  obtained  in  each  cor- 
responding pair  of  cases. 


56  CONSOLIDATED  STATEMENTS 

First  illustration. — ^Working  papers  prepared  at  the  date  of 
acquisition;  the  holding  company  purchased  all  of  the  stock 
of  the  subsidiary,  paying  book  value  therefor.  Book  value 
was  par,  for  the  subsidiary  had  no  surplus  or  deficit. 

Assets  Co.  A         Co.B         Elim.        C.  B.  S. 

Investment  in  Stock  of  Co.  B  (100%)  Cost  $50,000 
Eliminate  book  value  at  acquisition: 
Capital  stock $50,000 

Liabilities 
Capital  Stock: 

Co.  A $75,000  $75,000 

Co.  B $50,000 

Eliminate  holding  company's  100%  $50,000 

Surplus— Co.  A 15,000  15,000  S 

There  is  no  goodwill,  the  holding  company's  surplus  is 
$15,000,  and  there  is  no  minority  interest. 

Second  illustration. — During  the  year  the  subsidiary  made 
a  profit  of  $12,000,  and  hence  it  has  a  surplus  of  that  amount. 
The  holding  company  has  not  taken  up  this  profit;  hence  its 
investment  account  and  its  surplus  remain  unchanged. 

Assets  Co.  A  Co.  B  Elim.        C.  B.  S. 

Investment  in  Stock  of  Co.  B(100%)Cost  $50,000 
Eliminate  book  value  at  acquisition: 
Capital  stock $50,000 

Liabilities 
Capital  Stock: 

Co.  A $75,000  $75,000 

Co.  B $50,000 

Eliminate  holding  company's  100%  $50,000 

Surplus: 

Co.  A 15,000  15,000  S 

Co.B 12,000  12,000  S 

There  is  no  goodwill. 

The  surplus  shown  on  the  consolidated  balance  sheet  will 
be  $27,000,  being  the  sum  of  the  holding  company's  own 
surplus  account  and  100  per  cent  of  the  earnings  of  the  sub- 
sidiary since  the  date  of  acquisition. 

There  is  no  minority  interest. 

Third  illustration. — During  the  second  year  the  subsidiary 
lost  $18,000,  thus  wiping  out  its  surplus  and  leaving  it  with  a 
deficit  of  $6,000.    The  holding  company  made  no  record  of 


BALANCE  SHEETS  AFTER  ACQUISITION       57 

this  loss  and  hence  its  investment  account  and  its  surplus  re- 
main unchanged. 

Assets  Co.  A         Co.  B  Elim.        C.  B.  S. 

Investment  in  Stock  of  Co.  B(100%)Cost  $50,000 
Eliminate  book  value  at  acquisition: 

Capital  stock $50,000 

Deficit— Co.  B $6,000 

Holding  company's  100%  of  de- 
crease in  surplus  since  the  date 
of  acquisition $6,000  S 

Liabilities 
Capital  Stock: 

Co.  A $75,000  $75,000 

Co.  B $50,000 

Eliminate  holding  company's  100%  $50,000 

Surplus— Co.  A 15,000  15,000  S 

There  is  no  goodwill. 

The  holding  company's  surplus  on  the  consolidated  balance 
sheet  will  be  shown  as  $9,000,  being  the  holding  company's 
own  surplus  balance  of  $15,000  minus  its  $6,000  proportion  of 
the  net  loss  of  the  subsidiary  since  the  date  of  acquisition. 

There  is  no  minority  interest. 

Fourth  illustration. — ^The  subsidiary  had  a  capital  stock  of 
$50,000  and  a  surplus  of  $10,000  at  the  date  when  the  holding 
company  acquired  its  stock.  The  holding  company  purchased 
90  per  cent  of  the  stock,  the  book  value  of  which  was  $54,000, 
and  the  purchase  price  $56,000.  The  balance  sheet  is  made  at 
the  date  of  acquisition. 

Assets  Co.  A          Co.  B         Elim.        C.  B.  S. 

Investment  in  Stock  of  Co.  B  (90%)  Cost  $56,000 
Eliminate  book  value  at  acquisition: 
Capital  stock:  90%  of  $50,000. . .  $45,000 

Surplus:           90%  of   10,000...  9,000 

Goodwill $2,000  G 

Liabilities 
Capital  Stock: 

Co.  A $75,000  $75,000 

Co.  B $50,000 

Eliminate  holding  company's  90%  $45,000 

Minority  interest  10%  S,OOOM 

Surplus: 

Co.  A 15,000  15,000  S 

Co.  B 10,000 

Minority:  10%  of  present  surplus  1,000M 

Eliminate  holding  company's  90%  9,000 


58  CONSOLIDATED  STATEMENTS 

There  is  a  $2,000  addition  to  goodwill.  The  holding  com- 
pany's surplus  is  $15,000.  The  minority  interest  is  $5,000 
capital  stock  plus  $1,000  surplus,  or  $6,000. 

Fifth  illustration. — During  the  first  year  the  subsidiary 
made  a  profit  of  $4,000,  thus  increasing  its  surplus  to  $14,000. 
The  holding  company  made  no  entries  for  this  profit;  hence  its 
investment  account  and  its  surplus  remain  unchanged. 

Assets  Co.  A         Co.  B         Elim.        C.  B.  S. 

Investment  in  Stock  of  Co.  B  (90%)  Cost  $56,000 

Eliminate  book  value  at  acquisition: 
Capital  stock :  90%  of  $50,000 . . .  $45,000 

Surplus:  90%  of   10,000...  9,000 

Goodwill $2,000  G 

Liabilities 
Capital  Stock: 

Co.  A $75,000  $75,000 

Co.  B $50,000 

Eliminate  holding  company's  90%  $45,000 

Minority  interest  10%  5,000M 

Surplus: 

Co.  A 15,000  15,000  S 

Co.  B 14,000 

Minority:  10%  of  14,000 

piesent  surplus 1,400M 

Elim.  H.  C:  90%  of  10,000 

surplus  at  acquis 9,000 

H.  C.  Surplus:       90%  of   4,000 
increase 3,600  S 

There  is  a  $2,000  addition  to  goodwill. 

The  holding  company's  surplus  will  appear  on  the  con- 
solidated balance  sheet  at  $18,600,  being  the  holding  com- 
pany's surplus  account  of  $15,000  plus  $3,600,  which  is  its  90 
per  cent  of  the  increase  in  the  subsidiary's  surplus  since  ac- 
quisition. 

The  minority  interest  is  $5,000  stock  plus  $1,400  surplus, 
or  $6,400. 

Sixth  illustration. — During  the  second  year  the  subsidiary 
lost  $16,000,  wiping  out  its  $14,000  surplus  and  leaving  it 
with  a  deficit  of  $2,000.  The  holding  company  made  no 
entry  for  this  loss,  and  hence  its  investment  account  and  its 
surplus  remain  unchanged. 


BALANCE  SHEETS  AFTER  ACQUISITION       59 

Assets  Co.  A  Co.  B  Elim.        C.  B.  S. 

Investment  in  Stock  of  Co.  B  (90%)  Cost  $56,000 

Eliminate  book  value  at  acquisition: 

Capital  stock:  90%  of  $50,000. . .  $45,000 

Surplus:  90%  of    10,000...  9,000 

Goodwill $2,000  G 

Deficit— Co.  B $2,000 

Minority:  10%  of  $2,000 

present  deficit 200M 

Elim.  H.  C.  90%  of   10,000 

surplus  at  acquisition. . .  9,000* 

Surplus:  90%  of  $12,000 

decrease  in  surplus 10,800  S 


Liabilities 
Capital  Stock: 

Co.  A $  75,000  $75,000 

Co.  B $50,000 

Eliminate  holding  company's  90%  $45,000 

Minority  interest                     10%  5,000M 

Surplus— Co.  A 15,000  15,000  S 

There  is  a  $2,000  addition  to  goodwill. 

The  holding  company's  surplus  will  appear  on  the  consoli- 
dated balance  sheet  at  $4,200,  being  the  holding  company's 
surplus  account  of  $15,000  minus  $10,800  which  is  its  90  per 
cent  of  the  net  decrease  in  the  subsidiary's  surplus  since  the 
date  of  acquisition. 

The  minority  interest  is  $5,000  stock  minus  $200  deficit,  or 
$4,800. 

It  will  be  observed  that  an  asterisk  appears  after  the  second 
$9,000  surplus  eHmination,  indicating  that  this  item  is  to  be 
deducted  in  obtaining  the  total  of  the  elimination  column. 
This  is  because  a  surplus  item  is  being  deducted  from  a  de- 
ficit.  The  asterisk  would  be  used  also  if  a  deficit  at  acquisi- 
tion were  being  deducted  from  a  surplus  at  the  date  of  the 
balance  sheet 

Seventh  illustration. — ^The  subsidiary  had  a  capital  stock  of 
$50,000  and  a  deficit  of  $10,000  at  the  date  when  the  holding 
company  acquired  its  stock.  The  holding  company  purchased 
90  per  cent  of  the  stock,  the  book  value  of  which  was  $36,000 
and  the  purchase  price  $34,000.  The  working  papers  are 
prepared  at  the  date  of  acquisition. 


60  CONSOLIDATED  STATEMENTS 

AsseU  Co.  A         Co.B         Elim.        C.  B.  S. 

Investment  in  Stock  of  Co.  B  (90%)  Cost  $34,000 
Eliminate  book  value  at  acquisition: 
Capital  stock :  90%  of  $50,000 . . .  $45,000 

Deficit:  90%  of    10,000...  9,000* 

Deduction  from  goodwill $2,000*G 

Deficit— Co.  B $10,000 

Minority:  10%  of  $10,000 

present  deficit 1,000  M 

EHm.H.C:             90%  of   10,000 
deficit  at  acquisition 9,000 

Liabilities 
Capital  Stock: 

Co.  A $75,000  $75,000 

Co.  B $50,000 

Eliminate  holding  company's  90%  $45,000 

Minority  interest                    10%  5,000  M 

Surplus— Co.  A 2,000  2,000  S 

There  is  a  $2,000  deduction  from  goodwill. 

The  holding  company's  surplus  is  $2,000,  the  balance  of  its 
surplus  account.  The  subsidiary  has  made  no  gains  or  losses 
since  the  date  of  acquisition. 

The  minority  interest  is  $5,000  stock  minus  $1,000  deficit^ 
or  $4,000. 

Eighth  illustration. — During  the  first  year  the  subsidiary 
lost  $5,000,  thus  increasing  its  deficit  to  $15,000.  The  hold- 
ing company  made  no  entries  for  this  loss;  hence  its  invest- 
ment account  and  its  surplus  remain  unchanged. 

Assets  Co.  A         Co.  B         Elim.        C.  B.  S. 

Investment  in  Stock  of  Co.  B  (90%)  Cost  $34,000 
Eliminate  book  value  at  acquisition: 
Capital  stock :  90%  of  $50,000 ...  $45,000 

Deficit:  90%  of   10,000...  9,000* 

Deduction  from  goodwill $2,000*G 

Deficit— Co.  B $15,000 

Minority :  10%  of  $15,000 

present  deficit 1,500  M 

Elim.  H.  C. :  90%  of   10,000 

deficit  at  acquisition  ....  9,0000 

Surplus:                    90%  of  $5,000 
decrease  since 4,500*  S 

Liabilities 
Capital  Stock: 

Co.  A $75,000  $75,000 

Co.B $50,000 

Eliminate  holding  company's  90%  $45,000 

Minority  interest                    10%  5,000  M 

Surplus— CcA 2,000  2,000  S 


BALANCE  SHEETS  AFTER  ACQUISITION       61 

There  is  a  $2,000  deduction  from  goodwill. 

The  deficit  appearing  on  the  consolidated  balance  sheet  will 
be  $2,500,  being  the  holding  company's  surplus  of  $2,000 
minus  $4,500  which  is  its  90  per  cent  of  the  $5,000  decrease  in 
subsidiary  surplus  since  the  date  of  acquisition. 

The  minority  interest  is  $5,000  stock  minus  $1,500  deficit, 
or  $3,500. 

Ninth  illustration. — During  the  second  year  the  subsidiary 
made  a  profit  of  $30,000  and  paid  a  dividend  of  $5,000,  causing 
a  net  increase  of  $25,000  in  its  surplus,  thereby  changing  its 
$15,000  deficit  into  a  surplus  of  $10,000. 

The  holding  company  made  no  entry  for  its  share  of  the 
$30,000  profits,  but  it  recorded  the  collection  of  its  share  of  the 
$5,000  dividend  by  debiting  Cash  and  crediting  Surplus  with 
$4,500.  This  entry  causes  no  change  in  the  investment  ac- 
count, but  the  holding  company's  surplus  is  increased  from 
$2,000  to  $6,500. 

Assets  Co.  A         Co.  B         Elim.        C.  B.  S. 

Investment  in  Stock  of  Co.  B  (90%)  Cost  $34,000 
Eliminate  book  value  at  acquisition: 
Capital  stock:  90%  of  $50,000. . .  $45,000 

Deficit:            90%  of   10,000...  9,000* 

Deduction  from  goodwill $2,000*G 

Liabilities 
Capital  Stock: 

Co.  A $75,000  $75,000 

Co.  B $50,000 

Eliminate  holding  company's  90%  $45,000 

Minority  interest  10%  .  5,000  M 

Surplus: 

Co.  A 6,500  6,500  S 

Co.B 10,000 

Minority:  10%  of  $10,000 

present  surplus 1,000  M 

Elim.  H.  C. :  90%  of    10,000 

deficit  at  acquisition  . .  9,000* 

Surplus:                90%  of  $20,000 
increase  since 18,000  S 

There  is  a  $2,000  deduction  from  goodwill. 

The  surplus  appearing  on  the  consolidated  balance  sheet 
will  be  $24,500,  being  the  sum  of  the  holding  company's 
$6,500  surplus  account  and  the  $18,000,  which  is  its  90  per  cent 
of  the  increase  in  the  subsidiary's  surplus  since  the  date  of 
acquisition. 


62  CONSOLIDATED  STATEMENTS 

Review  Exercises 

When  the  holding  company  takes  up  its  share  of  subsidiary 
profits,  losses  and  dividends  through  the  investment  account, 
eliminations  are  based  on  the  book  value  of  the  subsidiary 
stock  at  the  date  of  the  consolidated  balance  sheet.  When 
the  holding  company  carries  the  investment  account  at  cost, 
eliminations  are  based  on  the  book  value  at  the  date  of 
acquisition. 

As  a  means  of  reviewing  these  principles,  it  is  suggested  that 
the  reader  prepare  consolidated  balance  sheet  working  papers 
for  the  following  cases. 

In  all  cases  it  is  assumed  that  the  holding  company  owns  90 
per  cent  of  the  subsidiary  stock.  In  each  group  of  eight 
cases,  the  first  four  are  based  on  the  assumption  that  the 
holding  company  has  taken  up  its  90  per  cent  of  the  subsidiary 
gains  and  losses  through  its  investment  account;  the  second 
four  are  based  on  the  same  subsidiary  profits  and  losses,  but 
the  investment  account  is  carried  at  cost.  Neither  company 
has  paid  any  dividends. 

To  simplify  the  cases,  the  various  assets  and  liabilities  are 
shown  in  a  single  amount,  as  sundry  net  assets.  The  holding 
company  has  no  source  of  income  other  than  its  investment 
in  the  subsidiary  stock. 

The  solution  to  the  first  case  is  given  to  illustrate  the  form: 

Case  A: 

Assets  Co.  A  Co.  B  Elim.        C.  B.  S. 

Investment  in  Stock  of  Co.  B  (90)%. . .  $110,000 

Eliminate  present  book  value: 
Capital  stock:  90%  of  $100,000. .  $90,000 

Surplus:  90%  of     20,000..  18,000 

Goodwill $    2,000  G 

Sundry  Net  Assets 105,000  $120,000     225,000 

$215,000  $120,000     $108,000     $227,000 

Liabilities 
Capital  Stock: 

Co.  A $200,000  $200,000 

Co.  B $100,000 

Eliminate  holding  company's  90%  $90,000 

Minority  interest  10%  10,OOOM 

Surplus: 

Co.  A 15,000  15,000  S 

Co.  B 20,000 

Eliminate  holding  company's  90%  18,000 

Minority  interest  10% 2,000M 

$215,000     $120,000     $108,000     $227,000 


REVIEW  EXERCISES 


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Chapter  X 
INTER-COMPANY  RECEIVABLES  AND  PAYABLES 

Current  accounts. — It  has  already  been  stated  that  the  object 
of  the  consoHdated  balance  sheet  is  to  show  the  financial  con- 
dition of  a  group  of  related  companies  in  relation  to  the  outside 
world.    In  doing  so,  all  inter-company  accounts  are  eliminated. 

Related  companies  frequently  buy  from  and  sell  to  each  other 
on  credit,  with  the  result  that  the  accounts  receivable  of  one 
company  will  include  a  balance  due  from  a  related  company; 
and  the  same  inter-company  relation  will  be  recorded  among 
the  accounts  payable  of  the  other  company.  In  preparing 
the  consolidated  balance  sheet  working  papers,  the  inter- 
company accounts  receivable  and  accounts  payable  must  be 
eliminated,  only  the  net  amounts  being  carried  to  the  balance 
sheet  columns.  These  net  amounts  will  represent  the  accounts 
receivable  due  from  the  outside  world  and  the  accounts  pay- 
able due  to  the  outside  world. 

Advances. — When  the  capital  of  one  company  is  inadequate 
to  its  needs,  one  of  the  other  related  companies  may  advance 
funds  to  it.  The  company  receiving  the  advance  will  credit 
it  to  Advances  from Company,  and  the  company  mak- 
ing the  advance  will  charge  it  to  Advances  to Company. 

These  two  accounts  represent  an  inter-company  relation,  to 
be  offset  in  the  elimination  columns. 

Notes  receivable. — If  the  inter-company  indebtedness  takes 
the  form  of  a  note,  one  company  will  have  an  account  Notes 

Receivable — Company  ,  and  the  other  company  will 

have  an  account  Notes  Payable — Company  .     These 

two  accounts  should  also  be  offset  in  the  elimination  columns. 

Notes  receivable  discounted. — The  situation  is  a  little  more 
complex  when  one  company  has  discounted  notes  receivable 
taken  from  another  company.  To  illustrate,  let  it  be  assumed 
that  Company  A  has  given  a  $5,000  note  to  Company  B. 
Company  B  has  discounted  this  note  with  its  bankers.  At 
the  date  of  the  consolidated  balance  sheet,  the  note  has  not 

65 


66  CONSOLIDATED  STATEMENTS 

matured;  therefore  the  following  accounts  will  appear  in  the 
trial  balances  of  the  two  companies: 

COMPANY  A 
Notes  Payable— Company  B $5,000 

COMPANY   B 

Notes  Receivable — Company  A $5,000 

Notes  Receivable — Company  A — Discounted 5,000 

Since  the  note  is  in  the  hands  of  the  bankers,  the  liability  is 
no  longer  an  inter-company  one,  and  hence  it  must  be  shown 
as  a  Hability  on  the  consolidated  balance  sheet.  The  Notes 
Payable  account  on  Company  A's  books  should  be  offset 
against  the  Notes  Receivable  account  on  Company  B's  books, 
and  the  Notes  Receivable — Company  A — Discounted  account 
should  be  carried  to  the  consolidated  balance  shei^-t  column, 
thus: 

Assets  Co.  A  Co.  B  Elim.         C.  B.  S. 

Notes  Receivable— Co.  A $5,000        $5,000 

Liabilities 

Notes  Payable— Co.  B $5,000  $5,000 

Notes  Rec— Co.  A— Discounted ....  5,000  $5,000 

There  is  a  difference  of  opinion  among  accountants  as  to 
whether  the  $5,000  liability  to  the  outside  world  should  be 
shown  in  the  consolidated  balance  sheet  as  Notes  Receivable — 
Company  A — Discounted,  or  as  Notes  Payable.  Those  who 
favor  the  former  title  contend  that  the  note  is  a  direct  Habil- 
ity of  one  of  the  related  companies  and  a  secondary  liability 
of  the  other  company  and  hence  is  an  obHgation  different  in 
nature  from  a  note  signed  by  one  company  only.  Showing 
the  Hability  as  a  note  payable  would  not  indicate  the  Hability 
of  both  companies. 

The  author's  opinion  is  that  the  Notes  Payable  title  is 
preferable.  In  the  first  place,  the  consolidated  balance  sheet 
is  based  on  the  assumption  that  the  related  companies  are  a 
single  organization,  the  legal  fact  of  separate  corporate  entities 
being  ignored.  From  the  viewpoint  of  the  consolidated  balance 
sheet,  therefore,  a  note  signed  by  one  company  is  as  much  a 
Hability  of  the  organization  as  a  note  signed  by  one  company 
and  endorsed  by  another  related  company.  In  the  second  place, 
the  term  Notes  Receivable  Discounted  at  once  suggests  a 
contingent  liability,  and  since  an  inter-company  note  dis- 
counted with  an  outsider  is  a  positive  HabiHty,  the  term  is 
likely  to  be  misleading. 


INTER-COMPANY  ACCOUNTS  67 

Inter-company  bond  holdings. — ^When  one  company  holds 
bonds  of  another  company,  the  bonds  held  as  an  asset  by  one 
company  may  be  offset  against  the  bond  liability  of  the  other 
company,  and  only  the  net  amount  outstanding  in  the  hands 
of  the  public  be  shown  as  a  liability.  It  is  preferable,  however, 
to  carry  out  the  asset  account  and  the  liability  account  to  the 
balance  sheet  columns  of  the  working  papers,  and  deduct  the 
inter-company  holdings  from  the  total  Uability  on  the  face  of 
the  consoHdated  balance  sheet. 

If  a  corporation  has  an  authorized  bond  issue  of  $500,000, 
of  which  only  $400,000  has  been  issued,  the  facts  should  be 
shown  on  its  balance  sheet  thus: 

Bonds  Payable— Authorized $500,000 

Less  Treasury  Bonds 100,000 

Bonds  Outstanding $400,000 

This  procedure  is  followed  because  the  mortgage  is  security 
for  the  full  issue  of  $500,000,  and  the  company  has  $100,000 
of  bonds  available  for  issue  or  for  use  as  collateral  for  short 
term  loans  on  notes  payable. 

The  situation  is  analogous  in  the  case  of  inter-company 
bond  holdings,  as  the  bonds  are  virtually  treasury  bonds  of 
the  organization,  available  for  issue  or  for  use  as  collateral. 

Premium  or  discotmt  on  inter-company  bond  holdings. — 
If  the  company  which  purchased  the  bonds  paid  more  than  par 
for  them,  it  may  have  written  off  the  premium  against  its  sur- 
plus immediately.  It  is  better  accounting,  however,  to  amor- 
tize the  premium  by  periodical  charges  to  interest.  When  this 
is  done  the  balance  of  the  bond  investment  account  at  all  times 
prior  to  maturity  will  be  in  excess  of  the  par  of  the  bonds. 
In  preparing  the  consolidated  working  papers,  the  bond 
account  should  be  divided  into  two  parts,  par  and  premium. 
The  portion  representing  par  should  be  handled  in  the  manner 
described  in  the  preceding  section,  and  the  portion  representing 
premium  should  be  carried  to  the  consolidated  balance  sheet 
as  unamortized  premium  on  the  purchase  of  treasury  bonds 
under  the  caption  of  deferred  charges.    Thus: 

Assets  Co.  A         Co.  B         Elim.        C.  B.  S. 

Investment  in  Bonds  of  Co.  B $27,500 

Par  (Shown  on  the  C.   B.   S.   as 

treasury  bonds) $27,000 

Unamortized  premium  (Shown  as  a 

deferred  charge) 500 


68  CONSOLIDATED  STATEMENTS 

If  the  company  bought  the  bonds  at  a  discount,  the  working 
papers  should  be  prepared  as  follows: 

Assets  Co.  A         Co.  B        Elim.        C.  B.  S. 

Investment  in  Bonds  of  Co.  B $26,700 

Par $27,000 

Unamortized  discount 300* 

The  unamortized  discount  should  be  shown  on  the  con- 
solidated balance  sheet  under  the  caption  of  deferred  credits. 

Accrued  interest. — If  there  are  inter-company  bonds  or 
notes,  the  balance  sheet  of  the  company  issuing  the  paper 
may  show  a  liability  for  accrued  interest.  The  company  hold- 
ing the  paper  should  then  show  an  asset  of  accrued  interest 
receivable.  The  accrued  interest  receivable  should  be  offset 
against  the  accrued  interest  payable,  only  the  net  amount  due 
to  the  outside  creditors  being  shown  on  the  consolidated  bal- 
ance sheet. 

Declared  dividends  unpaid. — If  the  subsidiary  has  declared 
dividends  which  are  unpaid  at  the  date  of  the  balance  sheet, 
its  books  will  show  a  liability  of  dividends  payable.  The  hold- 
ing company's  books  should  show  an  asset  of  dividends 
receivable,  which  should  be  offset  against  the  dividends 
payable.  The  consohdated  balance  sheet  will  then  show  only 
the  dividends  declared  and  payable  to  the  outside  or  minority 
stockholders. 

Adjusting  inter-company  accounts. — ^All  inter-company  rela- 
tions should  be  shown  on  the  books  of  both  related  companies, 
so  that  the  same  amount  may  be  eliminated  from  the  assets 
and  the  Habilities.  If  any  inter-company  transactions  have 
been  recorded  on  the  books  of  one  company  only,  they  should 
be  taken  up  on  the  books  of  the  other  company  before  the 
consohdated  balance  sheet  is  prepared. 

Goods  may  have  been  sold  by  one  company  to  another  just 
prior  to  the  close  of  the  year  and  recorded  in  the  current 
account  of  the  selling  company,  but  not  taken  up  in  the  books 
of  the  purchasing  company.  Before  preparing  the  consolidated 
balance  sheet  these  goods  should  be  added  to  the  purchasing 
company's  inventory  and  credited  to  the  purchasing  company's 
current  account  with  the  selling  company. 

If  services  have  been  rendered  by  one  company  and  recorded 
by  a  charge  to  the  current  account  and  a  credit  to  income,  and 
if  the  balance  sheet  of  the  other  company  is  drawn  up  before 
recording  the  transaction,   an   adjustment    should    be  made 


INTER-COMPANY  ACCOUNTS  69 

debiting  Surplus  and  crediting  the  current  account  of  the 
company  rendering  the  service. 

If  a  company  holding  bonds  of  a  related  company  has  not 
taken  up  its  share  of  the  accrued  interest  on  these  bonds,  an 
adjustment  should  be  made  debiting  Bond  Interest  Receivable 
and  crediting  Surplus. 

If  the  subsidiary  has  declared  a  dividend  which  is  unpaid  at 
the  date  of  the  balance  sheet  and  which  is  shown  on  its  books  as 
Dividends  Payable,  the  holding  company  should  take  up  its 
share  by  a  debit  to  Dividends  Receivable.  The  offsetting  credit 
will  depend  upon  the  method  adopted  by  the  holding  company 
for  carrying  its  investment  in  the  subsidiary  stock.  If  it  has 
taken  up  its  share  of  subsidiary  profits  and  losses  by  the  method 
explained  in  Chapter  VII,  the  offsetting  credit  for  the  dividend 
will  be  made  in  the  investment  account.  If  the  investment 
account  is  carried  at  cost,  the  offsetting  credit  will  be  made 
to  Surplus. 

All  of  these  adjustments  may  be  indicated  by  the  use  of 
Adjustment  columns  in  the  consolidated  working  papers. 

Illustration. — Company  A  owns  90  per  cent  of  the  stock  of 
Company  B  and  95  per  cent  of  the  stock  of  Company  C.  It 
carries  its  investment  account  with  Company  C  at  cost,  but 
has  taken  up  its  share  of  the  profits  and  losses  of  Company  B. 
The  balance  sheets  of  the  three  companies  at  December  31, 
1921,  were  as  follows: 

BALANCE  SHEET— COMPANY  A 

Investment  in  Stock  of  Co.  B    $64,000        Accounts  Payable $25,000 

Investment  in  Stock  of  Co.  C     68,000        Capital  Stock 100,000 

Cash 5,000        Surplus 69,000 

Co.  B  Current 6,000 

Advances  to  Co.  C 10,000 

Investment  in  Bonds  of  Co.  B .  41 ,000 


$194,000  $194,000 

BALANCE  SHEET— COMPANY  B 

Cash $20,000        Bonds  Payable $50,000 

Merchandise  Inventory 40,000        Bond  Interest  Accrued 1,500 

Notes  Receivable— Co.  C. . . .      15,000        Accounts  Payable 15,000 

Plant 75,000        Company  A  Current 8,000 

Notes  Receivable — Co.  C — 

Discounted 6,000 

Dividends  Payable 3,000 

Capital  Stock 50,000 

Surplus 16,500 

$150,000*  $150.000 


70  CONSOLIDATED  STATEMENTS 


BALANCE  SHEET-COMPANY  C 

Cash $3,000        Accounts  Payable $5,000 

Merchandise  Inventory 62,000        Advances  from  Co.  A 10,000 

Notes  Receivable 11,000        Notes  Payable— Co.  B 15,000 

Plant 14,000        Dividends  Payable 2,000 

Capital  Stock 40,000 

Surplus 18,000 


$90,000  $90,000 


Company  A  holds  bonds  of  Company  B  of  a  par  value  of 
$40,000;  the  additional  $1,000  in  the  bond  investment  account 
represents  unamortized  premium.  At  the  date  when  Company 
A  acquired  its  interest  in  the  stock  of  Company  C,  the  latter 
company  had  a  surplus  of  $30,000.  The  Company  B  Current 
account  in  the  holding  company's  balance  sheet  has  a  balance 
of  $6,000,  while  the  offsetting  current  account  on  Company 
B's  balance  sheet  has  a  balance  of  $8,000.  This  difference  is 
accounted  for  as  follows:  Company  A  acts  as  a  selling  agent 
for  Company  B  on  a  commission  basis,  and  at  December  31 
Company  A  charged  Company  B  $1,000  as  commission  on 
sales  made  during  December,  and  these  commissions  have  not 
been  taken  up  on  the  books  of  Company  B.  On  December  30 
Company  B  drew  a  draft  on  Company  A  for  $3,000,  depositing 
the  proceeds;  this  transaction  has  not  been  taken  up  on  the 
books  of  Company  A.  The  holding  company  has  not  taken 
up  its  proportion  of  accrued  bond  interest  and  declared  div- 
idends. 

Explanation  of  adjustments. — Capital  letters  are  used  to 
indicate  offsetting  adjustments  and  small  letters  to  indicate 
offsetting  eliminations.     Adjustments  are  made  as  follows: 

(A)  To  take  up  the  holding  company's  90  per  cent  of  the  divi- 
dends declared  by  Company  B.  Ninety  per  cent  of  $3,000  = 
$2,700.  Since  the  holding  company  has  reflected  its  share  of 
the  profits  and  losses  of  Company  B  in  its  investment  account, 
the  dividends  declared  should  be  treated  as  a  reduction  of  the 
investment  account.  Hence  the  entry:  debit  Dividends 
Receivable  and  credit  Investment  in  Stock  of  Company  B. 

(B)  To  take  up  on  the  holding  company's  records  the  draft 
drawn  by  Company  B,  by  a  debit  to  Company  B  Current  and  a 
credit  to  Cash,  $3,000. 

(C)  To  take  up  the  interest  accrued  on  bonds  of  Company  B 
held  by  Company  A;  debit  Bond  Interest  Receivable  and 


INTER-COMPANY  ACCOUNTS  71 

credit  Surplus  $1,200,  being  80  per  cent  of  the  $1,500  accrued 
bond  interest  shown  in  Company  B's  balance  sheet. 

(D)  To  take  up  the  holding  company's  95  per  cent  of  the 
dividends  declared  by  Company  C.  Ninety-five  per  cent  of 
$2,000  =  $1,900.  Since  the  holding  company  is  carrying  its 
investment  in  Company  C  stock  at  cost,  the  dividends  are 
treated  as  income.  Hence  the  entry:  debit  Dividends  Re- 
ceivable and  credit  Surplus. 

(E)  To  take  up  on  Company  B*s  records  the  commission 
charged  by  Company  A  on  sales,  $1,000.  Debit  Surplus  and 
credit  Company  A  Current.  This  entry  affects  the  surplus  of 
Company  B  and  hence  the  amount  eliminated  from  the  Com- 
pany B  investment  account  on  Company  A's  balance  sheet. 

COMPANY  A  AND  SUBSIDIARY  COMPANIES  B  AND  C 

Consolidated  Balance  Sheet 

December  31, 1921 

Current  Assets: 

Cash $25,000 

Notes  Receivable 11,000 

Merchandise  Inventory 102,000  $138,000 

Fixed  Assets: 

Plant 89,000 

Goodwill 3,850       92,850 

Deferred  Charges: 

Unamortized  Premium  on  Purchase  of  Treasury  Bonds. . .  1,000 

$231,850 

_  _.,.,..  Liabilities 

Current  Liabilities: 

Accounts  Payable $45,000 

Notes  Payable 6,000 

Accrued  Bond  Interest 300 

Dividends  Payable 400     $51,700 

Fixed  Liabilities: 

Bonds  Payable 50,000 

Less  Treasury  Bonds 40,000       10,000 

Minority  Interests: 

Company  B— 10% 6,550 

Company  C-  5% 2,900        9,450 

Capital: 

Capital  Stock 100,000 

Surplus 60,700     160,700 

$231,850 


72 


CONSOLIDATED  STATEMENTS 


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INTER-COMPANY  ACCOUNTS 


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Chapter  XI 
MISCELLANEOUS  TOPICS 

Book  value  at  acquisition  in  excess  of  cost. — Chapter  VI 
contained  a  discussion  of  the  treatment  of  the  excess  of  book 
value  at  acquisition  over  the  cost  of  the  stock  purchased  by  the 
holding  company.  The  discussion  in  that  chapter  was  limited 
to  the  condition  where  a  goodwill  account  appeared  on  the 
books  of  the  subsidiary  whose  stock  was  purchased  at  less 
than  book  value.  It  is  now  necessary  to  discuss  the  proper 
treatment  when  the  subsidiary  has  no  goodwill  account. 

It  is  the  custom  in  such  cases  to  treat  the  excess  of  book 
value  over  cost  as  a  deduction  from  goodwill  wherever  found 
in  the  consolidated  working  papers.  That  is  to  say,  it  may  be 
deducted  from  goodwill  appearing  on  the  books  of  the  holding 
company,  on  the  books  of  any  other  subsidiary,  or  arising  from 
the  purchase  of  the  stock  of  some  other  subsidiaiy  at  more  than 
book  value.  While  this  is  customary,  it  does  not  seem  to  be 
theoretically  correct. 

Assuming  that  the  subsidiary  has  no  goodwill  account  at 
the  date  of  acquisition,  the  fact  that  the  holding  company 
acquired  its  stock  at  less  than  book  value  would  seem  to 
indicate  one  of  two  things:  either  some  asset  on  the  subsidiary's 
books  was  over-valued  or  the  holding  company  made  a  fortu- 
nate purchase,  acquiring  the  right  to  more  net  assets  than  it 
parted  with.  If  some  asset  was  over-valued,  the  excess  of  the 
book  value  over  purchase  price  should  be  deducted  on  the 
consolidated  balance  sheet  from  the  over-valued  asset.  If 
no  subsidiary  asset  was  over-valued,  and  if  the  holding  com- 
pany acquired  the  subsidiary  stock  by  an  issue  of  its  own 
stock,  it  would  seem  that  the  excess  value  received  over  the 
par  of  the  stock  issued  in  payment  is  paid-in  surplus,  to  be 
shown  on  the  consolidated  balance  sheet  as  surplus,  set  apart 
as  capital  surplus  if  the  distinction  is  desired.  If  the  holding 
company  acquired  the  subsidiary  stock  by  a  cash  payment, 
the  excess  would  still  appear  to  be  a  proper  addition  to  cap- 
ital surplus. 

74 


MISCELLANEOUS  TOPICS  75 

It  is  difficult  to  see  the  logic  of  offsetting  "negative  goodwill" 
against  goodwill  appearing  on  the  holding  company's  books. 
If  the  holding  company's  goodwill  account  is  a  legitimate  one, 
the  purchase  of  a  subsidiary's  stock  at  less  than  book  value 
would  not  seem  to  cause  a  decrease  in  the  value  of  the  holding 
company's  goodwill,  unless  the  subsidiary's  earnings  were  so 
small  that  the  investment  would  not  pay  a  reasonable  rate  of 
income.  In  this  case  the  excess  earnings  of  the  holding  com- 
pany may  be  reduced  and  the  capitalized  value  of  the  holding 
company's  excess  earnings,  or  goodwill,  may  be  reduced.  The 
same  reasoning  would  apply  to  offsetting  "negative  goodwill" 
against  goodwill  appearing  on  the  books  of  one  of  the  other 
subsidiaries,  or  against  goodwill  arising  from  the  purchase  of 
the  stock  of  another  subsidiary. 

Of  course  it  must  be  admitted  that  it  is  more  conservative  to 
deduct  such  items  from  goodwill  wherever  found  than  to  add 
them  to  surplus.  But  it  may  be  said  that  while  it  is  con- 
servative to  write  off  any  goodwill  account  it  is  not  obligatory 
to  do  so.  Each  case  must  be  decided  in  the  Hght  of  all  related 
facts  with  the  guidance  of  the  following  principles : 

If  the  subsidiary  whose  stock  is  acquired  at  less  than  book 
value  has  a  goodwill  account,  the  negative  goodwill  should  be 
offset  against  the  subsidiary's  goodwill. 

If  there  are  over-valued  assets  on  the  subsidiary's  books,  the 
excess  of  book  value  of  the  stock  acquired  over  cost  should  be 
deducted  from  the  assets  known  to  be  over-valued.  If  no 
specific  over-valuation  is  known,  but  such  over-valuation  is 
believed  to  exist,  the  excess  cannot  be  deducted  from  specific 
assets  but  may  be  shown  on  the  liability  side  of  the  consolidated 
balance  sheet  as  a  reserve.  Any  descriptive  title  is  satisfactory, 
such  as  Reserve  for  Revaluation  of  Subsidiary  Assets. 

If  no  subsidiary  assets  are  over-valued,  the  excess  is  a  proper 
addition  to  the  consolidated  surplus,  preferably  shown  as 
Capital  Surplus  to  indicate  that  it  did  not  arise  from  operations. 

If  it  is  desired  to  be  conservative  and  write  off  goodwill 
accounts,  the  excess  may  be  deducted  from  goodwill  wherever 
found. 

Minority  interest — subsidiary  deficit. — In  all  working  papers 
thus  far  prepared,  the  minority  interest  has  been  shown  at  an 
amount  equal  to  the  minority's  share  of  the  subsidiary's  stock 
plus  its  share  of  the  subsidiary's  surplus  or  minus  its  share  of 
the  subsidiary's  deficit  at  the  date  of  the  consolidated  balance 


76  CONSOLIDATED  STATEMENTS 

sheet.  In  case  the  subsidiary  has  a  deficit  some  accountants 
show  the  minority  interest  at  the  par  of  the  stock  without 
deduction  of  their  pro-rata  share  of  the  deficit.  The  result  of 
this  treatment  is  that  the  minority's  share  of  the  subsidiary's 
deficit  is  deducted  from  the  holding  company's  surplus.  The 
difference  in  treatment  may  be  shown  by  the  following  illustra- 
tion, in  which  it  is  assumed  that  the  holding  company  has 
taken  up  its  share  of  subsidiary  gains  and  losses.  In  the  follow- 
ing working  papers  the  minority  interest  is  reduced  by  its  share 
of  the  subsidiary's  deficit. 

Assets  Co.  A         Co.  B         Elitn.        C.  B.  S. 

Investment  in  Stock  of  Co.  B  (90%) ...  $  38,000 
Eliminate  book  value: 
Capital  stock:  90%  of  $50,000. . .  $45,000 

Deficit:  90%  of   10,000...  9,000* 

Goodwill $    2,000  G 

Cash 22,000       $20,000  42,000 

Merchandise 80,000   ,     45,000  125,000 

Deficit— Co.  B 10,000 

Minority:      10%  of  $10,000 1,000M 

Elim.H.C.:90%of   10,000 9,000 

$140,000   $75,000   $45,000  $170,000 

Liahilities 

Accounts  Payable $  15,000       $25,000  $  40,000 

Capital  Stock: 

Co.  A 100,000  100,000 

Co.B 50,000 

Minority:      10% S,OOOM 

Elim.  H.  C:  90% $45,000 

Surplus— Co.  A 25,000  25,000  3 

$140,000      $75,000      $45,000     $170,000 


The  minority  interest  would  be  shown  on  the  consolidated 
balance  sheet  at  $4,000,  and  the  holding  company's  surplus  at 
$25,000. 

If  the  minority's  interest  is  not  to  be  diminished  by  its  share 
of  the  subsidiary's  deficit,  the  working  papers  would  be  pre- 
pared in  exactly  the  same  manner,  except  that  the  $1,000 
portion  of  the  subsidiary's  deficit  carried  out  above  as  a  deduc- 
tion from  the  minority's  interest,  would  be  carried  out  as  a 
deduction  from  the  holding  company's  surplus,  with  the  result 
that  the  minority  interest  would  be  shown  at  $5,000,  the  par 


MISCELLANEOUS  TOPICS  77 

of  the  stock  held  by  the  minority,  and  the  holding  company's 
surplus  would  be  shown  at  $24,000. 

Accountants  who  follow  this  latter  method  do  so  on  the 
theory  that  while  the  minority  will  share  in  profits,  the  holding 
company  will  be  obliged  to  "absorb  the  losses"  of  the  sub- 
sidiary in  order  to  hold  the  organization  together. 

While  it  is  true  that  the  subsidiary  may  be  such  an  essential 
part  of  the  organization  that  the  holding  company  will  consider 
it  expedient  to  retain  its  ownership  of  the  stock  in  spite  of 
these  losses,  it  does  not  seem  necessary  for  the  holding  com- 
pany to  assume  the  magnanimous  position  of  allowing  the 
minority  to  share  in  subsidiary  profits  while  relieving  them 
from  any  reduction  in  the  book  value  of  their  stock  caused  by 
losses.  As  long  as  the  subsidiary  is  able  to  pay  its  debts  the 
losses  merely  reduce  the  value  of  all  shares  proportionately. 
If  it  comes  to  a  point  where  the  subsidiary  is  unable  to  pay  its 
debts  it  may  be  necessary  for  the  holding  company  to  advance 
the  funds  necessary  to  pay  the  debts  and  prevent  the  creditors 
from  forcing  the  subsidiary  into  liquidation. 
'  As  an  extreme  illustration,  let  us  assume  that  the  subsidiary 
losses  have  resulted  in  a  deficit  equal  to  the  capital  stock,  and 
that  the  holding  company  has  not  seen  fit  to  make  advances 
to  keep  the  business  out  of  the  hands  of  the  creditors.  The 
creditors  therefore  take  possession,  and  the  holding  company 
loses  its  stock  and  the  minority  stockholders  lose  theirs.  But 
the  holding  company  does  not  bear  the  minority's  loss. 

On  the  other  hand,  assume  that  the  holding  company  has 
made  advances,  so  that  the  condition  is  as  follows: 

SUBSIDIARY  BALANCE  SHEET 

Net  Assets $  50,000      Advances  from  Holding  Company . .  $  50,000 

Deficit 100,000      Capital  Stock 100,000 

The  holding  company  may  now  take  over  the  assets  of  the  sub- 
sidiary in  settlement  of  the  advances;  again  the  holding  com- 
pany will  lose  its  share  of  the  stock  and  the  minority  will  lose 
their  share. 

The  purpose  of  a  balance  sheet  is  to  show  the  present  financial 
condition  of  a  business  organization.  It  would  seem  that  a 
consolidated  balance  sheet  fulfils  this  purpose  if  it  shows  all  of 
the  assets  and  liabilities  of  the  combined  companies,  and  the 
actual  present  interests  of  the  holding  company  and  the 
minority's  stockholders  in  these  net  assets.     Regardless  of 


78  CONSOLIDATED  STATEMENTS 

what  the  holding  company  may  have  to  do  in  the  future  (and 
it  is  difficult  to  see  how  it  will  have  to  bear  more  than  its  share 
of  the  loss),  it  cannot  be  denied  that  the  present  book  value 
of  the  minority's  interest  in  the  net  assets  of  the  organization 
is  measured  by  the  minority's  share  of  the  subsidiary's  capital 
stock  and  surplus  or  deficit. 

Stock  acquired  from  the  subsidiary. — In  all  illustrations 
heretofore  presented,  it  has  been  assumed  that  the  holding 
company  acquired  its  stock  by  purchase  from  former  stock- 
holders of  the  subsidiary.  The  stock  may  be  acquired  by  direct 
subscription  to  the  subsidiary.  The  difference  in  the  method 
of  acquiring  the  stock  would  have  no  effect,  however,  on  the 
method  of  making  eliminations  from  the  investment  account. 
If  the  investment  account  has  been  charged  with  subsidiary 
profits  and  credited  with  subsidiary  losses  and  dividends,  the 
book  value  of  the  stock  at  the  date  of  the  balance  sheet  should 
be  eliminated;  if  the  investment  is  carried  at  cost,  the  book 
value  at  the  date  of  acquisition  should  be  eliminated. 

Of  course,  the  book  value  at  the  date  of  acquisition  is  the 
book  value  after  the  holding  company  has  paid  for  the  stock. 
To  illustrate,  a  company  has  an  issue  of  $30,000  of  stock,  all 
outstanding  in  the  hands  of  individual  owners.  The  surplus  is 
$10,000.  An  additional  issue  of  $70,000  is  authorized  and  sold 
to  a  holding  company  at  150,  or  $105,000.  Eliminations  would 
be  made  as  follows  in  the  working  papers  prepared  at  the  date 
of  acquisition: 

Assets  Co.  A         Co.  B         Elim.        C.  B.  S. 

Investment  in  Stock  of  Co.  B  (70%) . . .  $105,000 
Eliminate  book  value: 

Capital  stock $70,000 

Surplus:  70%  of  $45,000 .'..  31,500 

Goodwill $3,500  G 

The  $45,000  surplus  is  the  sum  of  the  $10,000  surplus  on  the 
books  of  the  subsidiary  before  the  holding  company  acquired 
its  stock,  and  the  $35,000  premium  paid  for  the  stock. 

Liabilities  Co.  A         Co.  B  Elim.        C.  B.  S. 

Capital  Stock— Co.  B $100,000 

Eliminate  holding  company's  70%.  $70,000 

Minority  30%.  $30,000M 

Surplus— Co.  B 45,000 

Eliminate  holding  company's  70%.  31,500 

Minority  30%.  13,500M 


MISCELLANEOUS  TOPICS  79 

Before  the  issue  of  additional  stock,  the  old  stockholders  had 
a  capital  interest  of  $40,000.  After  the  additional  issue  these 
stockholders  become  the  minority  and  have  an  interest  of 
$43,500.  In  other  words,  the  holding  company  paid  $3,500  as 
goodwill  to  obtain  control  of  this  business,  and  this  payment 
inures  to  the  benefit  of  the  minority  stockholders. 

Subscription  rights. — Corporations  frequently  allow  their 
stockholders  to  subscribe  for  additional  stock  at  par  or  at  some 
other  figure  less  than  book  value.  Regardless  of  the  price  paid 
for  the  new  stock  the  transaction  has  no  effect  on  the  goodwill 
appearing  in  the  consolidated  balance  sheet,  provided  all  stock- 
holders, including  the  minority,  take  new  stock  at  the  same 
price  and  in  amounts  proportionate  to  their  former  holdings. 
To  illustrate,  assume  that  immediately  after  the  holding  com- 
pany (in  the  preceding  illustration)  acquired  its  stock,  the  di- 
rectors of  the  subsidiary  authorized  the  issue  of  an  additional 
$50,000  of  stock  to  be  subscribed  and  paid  for  at  par  by  the 
present  stockholders  in  proportion  to  their  present  holdings. 
All  stock  is  issued  on  this  basis,  the  holding  company  taking 
$35,000  and  the  minority  $15,000.    The  working  papers  follow: 

Assets  Co.  A         Co.  B         Elitn.      C.  B.  S. 

Investment  in  Stock  of  Co.  B  (70%) . . .  $140,000 
Eliminate  book  value: 
Capital  stock:  70%  of  $150,000. .  $105,000 

Surplus:            70%  of     45,000..  31,500 

Goodwill $3,500  G 

Liabilities 

Capital  Stock— Co.  B $150,000 

Eliminate  holding  company's  70%.  $105,000 

Minority  30%.  $45,000M 

Surplus— Co.  B 45,000 

Eliminate  holding  company's  70%.  31,500 

Minority  30%.  13,S00M 

This  illustration  shows  that  when  all  stockholders  pay  for 
new  stock  at  the  same  price  and  take  it  in  proportion  to  their 
original  holdings,  their  payments  to  the  corporation  increase 
the  book  value  of  their  holdings  an  amount  exactly  equal  to 
their  payments  and  hence  there  is  no  effect  on  the  goodwill 
arising  from  the  original  purchase. 

If  the  holding  company  or  the  minority  should  fail  to  take 
new  stock  in  amounts  exactly  proportionate  to  their  former 
holdings,  the  computation  of  the  goodwill  would  be  affected 


80  CONSOLIDATED  STATEMENTS 

because  of  the  change  in  the  proportion  of  stock  ownership 
and  the  consequent  change  in  the  interests  of  the  holding  com- 
pany and  the  minority  in  the  surplus  of  the  subsidiary.  This 
fact  may  be  illustrated  by  assuming  that,  in  the  preceding  illus- 
tration, the  holding  company  took  all  of  the  stock  to  which  it 
was  entitled  while  the  minority  stockholders  took  only  $5,000 
of  new  shares.    The  total  issue  would  be: 

Par 

Stock  owned  by  holding  company: 

Original  purchase $70,000 

Additional 35,000     $105,000  75% 

Stock  owned  by  minority: 

Original  holding 30,000 

Additional 5,000        35,000  25% 

$140,000         100% 


CONSOLIDATED  WORKING  PAPERS 

Assets  Co.  A  Co.  B  Elim.        C.  B.  S. 

Investment  in  Stock  of  Co.  B  (75%) . . .  $140,000 
Eliminate  book  value: 
Capital  stock :  75%  of  $140,000 . .  $105,000 

Surplus:           75%  of     45,000..  33,750 

Goodwill $1,250  G 

Liabilities 

Capital  Stock— Co.  B $140,000 

Eliminate  holding  company's  75% .  $105,000 

Minority  25%.  $35,OOOM 

Surplus— Co.  B 45,000 

Eliminate  holding  company's  75% .  33,750 

Minority  25%.  11,250M 

It  will  be  noted  that  the  minority's  interest  in  the  surplus 
is  reduced  $2,250  and  the  holding  company's  interest  therein 
increased  an  equal  amount.  The  elimination  of  this  excess 
amount  reduces  the  goodwill  $2,250.  It  might  be  contended 
with  very  good  reason  that  the  original  stock  purchase  and  the 
subsequent  subscription  are  entirely  distinct  transactions; 
that  the  original  purchase  involved  a  payment  of  $3,500  for 
goodwill,  and  that  the  subsequent  transaction  transferred 
$2,250  of  the  subsidiary  surplus  from  the  minority  to  the 
holding  company  without  cost  to  the  holding  company;  and 


MISCELLANEOUS  TOPICS  81 

that  therefore  the  goodwill  should  be  shown  as  $3,500  since 
this  amount  was  paid  for,  and  that  the  $2,250  should  be  added 
to  the  holding  company's  surplus.  While  this  position  can  be 
defended,  the  treatment  shown  in  the  working  papers  is  more 
conservative. 

Holdings  of  no  par  value  stock. — ^The  method  of  making 
eliminations  is  not  affected  by  the  fact  that  the  subsidiary's 
stock  has  no  par  value.  The  book  value  of  the  holding  com- 
pany's ownings  is  determined  by  ascertaining  the  per  cent  of 
subsidiary  stock  owned  and  by  eliminating  this  percentage  of  the 
subsidiary's  stock  and  surplus  accounts.  To  illustrate,  assume 
that  the  subsidiary  has  an  issue  of  3,000  shares  of  no  par  value 
stock  for  which  $250,000  has  been  paid  in  and  credited  to  Capi- 
tal Stock.  The  subsidiary  also  has  a  surplus  of  $60,000.  The 
holding  company  acquired  2,400  shares  for  which  it  pays 
$260,000. 

CONSOLIDATED  WORKING  PAPERS 

Assets  Co.  A         Co.  B         FJim.        C.  B.  S. 

Investment  in  Stock  of  Co.  B  (80%) . . . 

2,400  shares  of  a  total  issue  of  3,000  $260,000 

Eliminate  book  value: 
Capital  stock:  80%  of  $250,000. .  $200,000 

Surplus:  80%  of     60,000..  48,000 

Goodwill 12,000  G 

Liabilities 

Capital  Stock— Co.  B $250,000 

Eliminate  holding  company's  80%.  $200,000 

Minority  20%.  $50,OOOM 

Surplus-Co.  B 60,000 

Eliminate  holding  company's  80%.  48,000 

Minority  20%.  12,000M 

Holdings  of  both  common  and  preferred  stock. — When  the 
holding  company  owns  both  common  and  preferred  stock,  it 
may  be  necessary  to  make  a  division  of  the  subsidiary  surplus 
into  the  portions  applicable  to  the  two  classes  of  stock,  in  order 
to  determine  their  book  value  and  make  proper  eliminations. 

If  the  holding  company  owns  the  same  proportion  of  each 
class,  it  will  not  be  necessary  to  make  a  division  of  the  sub- 
sidiary surplus,  since  the  two  investments  may  be  treated  as 
one,  and  a  single  elimination  made  to  determine  the  goodwill. 
The  following  working  papers  are  illustrative. 


82  CONSOLIDATED  STATEMENTS 

Assets  Co.  A         Co.  B         Elim.        C.  B.  S. 

Investment  in  Preferred  Stock  of  Co.  B 

(90%) $60,000 

Investment  in  Common  Stock  of  Co.  B 

(90%) 125,000 

Eliminate  book  value: 

90%  of  Preferred  stock $45,000 

90%  of  Common  stock 90,000 

90%  of  Surplus 36,000 

Goodwill .  $14,C00G 

Liabilities 

Capital  Stock  Preferred— Co.  B $50,000 

Eliminate  holding  company's  90% .  $45,000 

Minority  10%.  $5,000M 

Capital  Stock  Common— Co.  B 100,000 

Eliminate  holding  company's  90% .  90,000 

Minority  10%.  10,000M 

Surplus— Co.  B 40,000 

Eliminate  holding  company's  90%.  36,000 

Minority  10%.  4,000M 

If  the  holding  company  owns  different  proportions  of  the 
common  and  preferred  stock,  it  is  necessary  to  make  a  division 
of  the  subsidiary  surplus,  and  in  making  this  division  it  is 
necessary  to  consider  whether  the  subsidiary's  preferred  stock 
is  cumulative  or  non-cumulative,  participating  or  non-par- 
ticipating, and  whether  there  are  any  cumulative  dividends  in 
arrears.  In  the  following  illustrations,  it  will  be  assumed  that 
the  holding  company  bought  80  per  cent  of  the  preferred  stock 
for  $48,000  (par  value  $40,000)  and  90  per  cent  of  the  common 
stock  for  $106,000  (par  value  $90,000).  The  subsidiary  had 
no  surplus  at  the  date  of  acquisition.  The  total  paid  for  good- 
will was  therefore  $8,000  +  $16,000,  or  $24,000.  At  the  end  of 
one  year  the  subsidiary  has  made  a  profit  of  $18,000. 

In  the  first  place  it  will  be  assumed  that  the  preferred  stock 
is  non-cumulative  and  non-participating,  and  that  the  year's 
dividend  of  $3,000  has  been  paid  on  the  preferred  stock.  The 
preferred  therefore  has  no  further  claim  on  the  surplus  of  the 
subsidiary,  which  is  reduced  to  $15,000  by  the  payment  of  the 
preferred  dividend,  and  the  entire  $15,000  would  be  applicable 
to  the  common  stock.  Ninety  per  cent  of  this  amount  is  $13,500 
and  this  amount  should  have  been  taken  up  by  the  holding 
company  as  well  as  their  $2,400  dividend  on  the  preferred 
stock. 


MISCELLANEOUS  TOPICS  83 

CONSOLIDATED  WORKING  PAPERS 

Assets  Co.  A         Co.  B         Elim.        C.  B.  S. 

Investment  in  Preferred  Stock  of  Co.  B 

(80%) $48,000 

Eliminate  book  value: 

Capital  stock:  80%  of  $50,000...  $40,000 

Goodwill $8,000  G 

Investment  in  Common  Stock  of  Co.  B 

(90%) 119,500 

Eliminate  book  value: 
Capital  stock:  90%  of  $100,000. .  90,000 

Surplus:  90%  of     15,000..  13,500 

Goodwill 16,000  G 

Liabilities 

Capital  Stock  Preferred— Co.  B $50,000 

Eliminate  holding  company's  80%.  $40,000 

Minority  20%,-  $10,000M 

Capital  Stock  Common— Co.  B 100,000 

Eliminate  holding  company's  90% .  90,000 

Minority  10%  10,000M 

Surplus — Co.  B — Applicable  to  common 

stock 15,000 

Eliminate  holding  company's  90%.  13,500 

Minority  10%.  1,500M 

Surplus— Co.  A 15,900  15,900  S 

In  the  second  place  it  will  be  assumed  that  the  preferred 
stock  is  cumulative  and  non-participating,  and  that  there  are 
no  dividends  in  arrears.  The  rights  of  the  preferred  stock- 
holders in  the  subsidiary  surplus  have  therefore  been  satisfied 
by  the  payment  of  the  dividend,  and  the  entire  surplus  is  ap- 
plicable to  the  common  stock.  Therefore  the  working  papers 
would  be  identical  with  those  just  shown. 

In  the  third  place  it  will  be  assumed  that  the  preferred  stock 
is  cumulative  but  non-participating,  and  that  one  year's  div- 
idend of  6  per  cent  is  in  arrears.  The  surplus  is  therefore 
$18,000.  As  the  profits  have  been  earned,  the  preferred  stock- 
holders have  a  lien  against  them  to  the  extent  of  $3,000,  and 
the  holding  company  would  be  justified  in  taking  up  their 
80  per  cent  thereof  by  a  debit  to  the  investment  account  and  a 
credit  to  earnings.  The  subsidiary  surplus  is  divided  into  two 
parts:  $3,000  applicable  to  preferred  stock,  and  $15,000 
applicable  to  common  stock. 


84  CONSOLIDATED  STATEMENTS 

CONSOLIDATED  WORKING  PAPERS 

Assets  Co.  A         Co.  B         Elim.        C.  B.  S. 

Investment  in  Preferred  Stock  of  Co.  B 

(80%) $50,400 

Eliminate  book  value: 

Capital  stock :  80%  of  $50,000 . . .  $40,000 

Surplus:  80%  of     3,000...  2,400 

Goodwill $8,000  G 

Investment  in  Common  Stock  of  Co.  B 

(90%) 119,500 

Eliminate  book  value: 

Capital  stock :  90%  of  $100,000 . .  90,000 

Surplus:           90%  of     15,000..  13,500 

Goodwill 16,000  G 

Liabilities 

Capital  Stock— Preferred— Co.  B $50,000 

Eliminate  holding  company's  80%.  $40,000 

Minority  20%.  $10,000M 

Capital  Stock— Common— Co.  B 100,000 

Eliminate  holding  company's  90%.  90,000 

Minority  10%.  lO.OOOM 

Surplus — Co.  B  (Applicable  to  preferred 

stock) 3,000 

Eliminate  holding  company's  80%.  2,400 

Minority  20%.  600M 

Surplus — Co.  B  (Applicable  to  common 

stock) 15,000 

Eliminate  holding  company's  90% .  13,500 

Minority  10%.  1,500M 

Surplus— Co.  A  (2,400  +  13,500) 15,900  $15,900  S 

In  the  fourth  place  it  will  be  assumed  that  the  preferred  stock 
is  cumulative  and  participating  and  that  no  dividends  have  been 
paid  on  either  preferred  or  common  stock.  Since  the  pre- 
ferred stock  is  participating,  it  shares  pro-rata  with  the  com- 
mon stock  in  the  surplus.  Therefore  $6,000  of  the  earnings  are 
applicable  to  preferred  and  $12,000  are  applicable  to  common. 
The  holding  company  would  be  justified  in  making  the  follow- 
ing entry: 

Investment  in  Preferred  Stock  of  Co.  B  (80%  of  $6,000) ...    $  4,800 
Investment  in  Common  Stock  of  Co.  B  (90%  of  $12,000) . .      10,800 

Surplus $15,600 

To  take  up  our  share  of  the  earnings  of  Co.  B. 


MISCELLANEOUS  TOPICS 


S5 


CONSOLIDATED  WORKING  PAPERS 

Assets  Co.  A         Co.  B         Elim.        C.  B.  S. 

Investment  in  Preferred  Stock  of  Co.  B 

(80%) $52,800 

Eliminate  book  value: 
Capital  stock:  80%  of  $50,000. . .  $40,000 

Surplus:  80%  of     6,000...  4,800 

Goodwill 8,000  G 

Investment  in  Common  Stock  of  Co.  B 

(90%) 116,800 

Eliminate  book  value: 
Capital  stock:  90%  of  $100,000. .  90,000 

Surplus:  90%  of     12,000..  10,800 

Goodwill 16,000  G 

Liabilities 

Capital  Stock  Preferred— Co.  B $50,000 

Eliminate  holding  company's  80%.  $40,000 

Minority  20%.  $10,000M 

Capital  Stock  Common — Co.  B 100,000 

Eliminate  holding  company's  90% .  90,000 

Minority  10%.  10,000M 

Surplus— Co.  B 18,000 

Applicable  to  Preferred— $6,000 .  . . 

Eliminate  holding  company's  80%  4,800 

Minority  20%  1,200M 

Applicable  to  Common — $12,000. . . 

Eliminate  holding  company's  90%  10,800 

Minority  10%  1,200M 

Surplus— Co.  A $15,600  15,600  S 

Stock  dividends. — If  the  holding  company  carries  its  invest- 
ment at  cost,  stock  dividends  should  be  taken  up  by  a  debit 
to  the  investment  account  and  a  credit  to  surplus,  as  illustrated 
in  the  following  example: 

Company  A  purchased  90  per  cent  of  the  stock  of  Company 
B  at  January  1,  1920,  paying  $140,000  therefor.  At  that  date 
Company  B  had  a  capital  stock  of  $100,000  and  a  surplus  of 
$50,000.  During  the  year  Company  B  made  a  profit  of  $25,000, 
and  at  the  end  of  the  year  declared  and  issued  a  stock  dividend 
of  $40,000,  of  which  Company  A  received  $36,000.  Assuming 
that  Company  A  had  no  surplus  at  the  beginning  of  the  year 
and  made  no  profits  from  its  own  operations,  the  working 
papers  at  the  end  of  the  year  would  be: 


86  CONSOLIDATED  STATEMENTS 

Assets  Co.  A         Co.  B  Elitn.        C.  B.  S. 

Investment  in  Stock  of  Co.  B $176,000 

Eliminate  book  value  at  acquisition: 
Capital  stock:  Original  purchase.  $90,000 

Stock  dividend...  36,000 

Surplus :  90%  of  $50,000 45,000 

Goodwill $5,000  G 

Liabilities 

Capital  Stock $140,000 

Eliminate  Co.  A's  90% $126,000 

Minority  10% $14,000M 

Surplus: 

Co.  A $36,000  36,000  S 

Co.  B 35,000 

Minority:      10%  of  $35,000  pres. 

surplus 3,500M 

Elim.H.C.:90%of  50,000     at 

acquis 45,000 

Surplus:        90%  of  15,000    de- 
crease   13,500*S 

The  surplus  on  the  consolidated  balance  sheet  will  be 
$22,500,  which  is  90  per  cent  of  the  year's  profits  of  Company  B. 

If  the  stock  dividend  were  not  taken  up  by  the  holding 
company,  a  portion  of  the  capital  stock  of  the  subsidiary  would 
have  to  be  carried  out  to  the  balance  sheet  columns  as  surplus 
to  appear  in  the  consolidated  balance  sheet  because  the  sub- 
sidiary earnings  since  the  date  of  acquisition  have  been  merged 
with  the  profits  prior  to  acquisition  and  a  portion  of  this 
surplus  has  been  transferred  to  the  capital  stock  account  of  the 
subsidiary. 

Assets  Co.  A  Co.  B  Elim.        C.  B.  S. 

Investment  in  Stock  of  Co.  B $140,000 

Eliminate  book  value  at  acquisition: 

Capital  stock $90,000 

Surplus:  90%  of  $50,000 45,000 

Goodwill 5,0OOG 

Liabilities 

Capital  Stock— Co.  B . . . . ; $140,000 

Minority          10%  of  present  stock  $14,000M 
Elim.  Co.  A's  90%  of  stock  at  ac- 
quisition                                         $90,000 

Surplus 36,000  S 

Surplus— Co.  B 35,000 

Minority         10%  of  $35,000  pres- 
ent surplus 3,500M 

Elim.  Co.  A's  90%  of  50,000  surp. 

at  acquisition ....  45,000 

Surplus:           90%   of  15,000    de- 
crease   13,500*S 


MISCELLANEOUS  TOPICS  87 

If  the  holding  company  takes  up  its  share  of  subsidiary 
profits  and  losses,  no  entry  should  be  made  on  the  holding  com- 
pany's books  for  the  stock  dividend,  as  it  represents  merely 
a  transfer  of  a  portion  of  the  net  worth  from  the  subsidiary's 
surplus  to  its  capital  stock  account.  If  Company  A  has  taken 
up  its  $22,500  profits  from  Company  B  during  the  year,  the 
working  papers  will  appear  as  follows: 

Assets  Co.  A         Co.  B         Elim.        C.  B.  S. 

Investment  in  Stock  of  Co.  B $162,500 

Eliminate  present  book  value: 
Capital  stock:  90%  of  $140,000. .  $126,000 

Surplus:           90%  of     35,000..  31,500 

Goodwill $5,000  G 

Liabilities 

Capital  Stock— Co.  B $140,000 

Eliminate  Co.  A's  90% $126,000 

Minority  10% $14,000M 

Surplus: 

Co.  A $22,500  22,500  S 

Co.  B 35,000 

Eliminate  Co.  A's  90% 31,500 

Minority  10% 3,500M 

Arbitrary  entries  in  investment  accotmt. — In  some  instances 
a  holding  company  will  not  take  up  the  profits  and  losses  of  its 
subsidiary  but  will  at  intervals  make  entries  of  an  arbitrary 
amount  to  raise  or  lower  the  investment  account  to  an  esti- 
mated present  value.  If  the  entry  adjusts  the  investment  to 
its  present  book  value  as  measured  by  the  capital  stock  and 
surplus  accounts  of  the  subsidiary,  and  if  eliminations  are  made 
in  the  working  papers  on  the  basis  of  present  book  value,  the 
effect  will  be  to  eliminate  from  the  consolidated  balance  sheet 
any  goodwill  or  negative  goodwill  in  the  stock  purchase.  To 
illustrate.  Company  A  purchased  90  per  cent  of  the  stock  of 
Company  B,  paying  $115,000  therefor.  At  the  date  of  acquisi- 
tion Company  B  had  a  capital  stock  of  $100,000  and  a  surplus 
of  $20,000,  so  that  its  book  value  was  $120,000.  Ninety  per 
cent  was  $108,000,  and  there  was  therefore  a  goodwill  ele- 
ment of  $7,000  in  the  purchase.  The  investment  account  was 
carried  at  cost  until  the  end  of  the  year  at  which  time  the 
subsidiary  had  a  surplus  of  $50,000,  making  its  book  value 
$150,000,  and  90  per  cent  thereof,  $135,000.  Company  A 
thereupon  made  an  entry  debiting  the  investment  account  and 


88  CONSOLIDATED  STATEMENTS 

crediting  surplus  with  $20,000  to  raise  the  investment  account 
from  $115,000  to  $135,000.  If  eHminations  are  made  on  the 
basis  of  present  book  values,  the  working  papers  will  appear 
as  follows: 

Assets  Co.  A         Co.  B         Elim.        C.  B.  S. 

Investment  in  Stock  of  Co.  B  (90%). . .  $135,000 
Eliminate  present  book  value: 
Capital  stock:  90%  of  $100,000. .  $90,000 

Surplus:  90%  of     50,000..  45,000 

Liabilities 

Capital  Stock— Co.  B $100,000 

Eliminate  holding  company's  90% .  $90,000 

Minority  interest  10%.  $10,000M 

Surplus: 

Co.  A $20,000  20,000  8 

Co.  B.. 50,000 

Eliminate  holding  company's  90%  45,000 

Minority  interest  10%  5,000M 

These  working  papers  show  that  the  goodwill  of  $7,000  is 
eliminated,  and  that  the  holding  company's  surplus  is  only 
$20,000,  whereas  the  holding  company  should  have  taken  up 
its  90  per  cent  of  the  $30,000  profits  for  the  year,  or  $27,000. 
Because  of  the  erroneous  results  produced  if  such  arbitrary 
entries  are  ignored,  it  is  advisable  to  reverse  them  by  adjust- 
ing entries  in  the  consohdated  working  papers. 


Chapter  XII 

MAJOR  HOLDING  COMPANY  CONTROL  THROUGH 
A  MINOR  HOLDING  COMPANY 

Outiine  of  chapter. — ^This  chapter  will  contain  four  sections 
devoted  to  the  following  subjects : 

1.  An  explanation  of  the  method  by  which  a  major  holding 
company  may  control  a  group  of  corporations  through 
the  ownership  of  the  stock  of  a  minor  holding  company. 

2.  A  discussion  of  the  reasons  why  it  is  desirable  for  the 
holding  companies,  and  particularly  the  minor  holding 
company,  to  take  up  the  subsidiary  profits,  losses  and 
dividends  through  the  investment  accounts  rather  than 
to  carry  the  investment  accounts  at  cost. 

3.  An  illustration  of  the  preparation  of  consolidated  working 
papers  when  the  investment  accounts  have  been  charged 
with  subsidiary  profits  and  credited  with  subsidiary 
losses  and  dividends. 

4.  An  illustration  of  the  preparation  of  consolidated  working 
papers  when  the  investment  accounts  are  carried  at  cost. 

Major  and  minor  holding  company. — In  the  process  of  com- 
bining a  group  of  corporations  it  frequently  happens  that  one 
company  will  buy  a  controlling  interest  in  the  stock  of  another 
company  which  is  itself  a  holding  company  owning  stock  in  a 
subsidiary.  The  minor  holding  company  controls  only  its  own 
subsidiary,  but  the  major  holding  company  controls  the  minor 
holding  company  and  thus  controls  the  entire  organization. 

Advantage  of  taking  up  subsidiary  profits,  losses  and  div- 
idends.— In  discussing  this  subject  we  shall  first  consider  the 
minor  holding  company  and  discuss  the  reasons  why  it  is  de- 
sirable for  it  to  take  up  the  profits,  losses  and  dividends  of  its 
subsidiary;  second,  we  shall  consider  the  advantages  resulting 
from  having  the  major  holding  company  also  take  up  profits, 
losses  and  dividends. 

If  the  minor  holding  company  takes  up  the  profits,  losses 
and  dividends  of  its  subsidiary,  the  preparation  of  the  con- 

89 


90  CONSOLIDATED  STATEMENTS 

solidated  balance  sheet  will  be  facilitated  in  three  particulars: 
namely,  the  computation  of  the  goodwill,  the  minority  interest 
and  the  surplus. 

The  goodwill  involved  in  the  purchase  of  the  minor  holding 
company's  stock  by  the  major  holding  company  is  the  excess 
of  the  purchase  price  over  the  book  value  of  the  minor  holding 
company's  stock  at  the  date  of  acquisition.  If  the  minor  hold- 
ing company  has  not  taken  up  the  profits  of  its  subsidiary,  its 
surplus  will  be  under-stated  because  it  will  not  include  the 
profits  which  it  has  earned  through  the  operations  of  its  sub- 
sidiary. The  under-statement  of  surplus  means  an  under- 
statement of  book  value,  and  this  in  turn  means  an  over- 
statement of  goodwill.  To  illustrate,  assume  that  Company  B 
has  a  capital  stock  of  $100,000  and  a  surplus  of  $50,000  arising 
from  its  own  operations.  It  owns  all  of  the  stock  of  Company 
C  but  has  not  taken  up  the  $25,000  profit  earned  by  Company 
C  since  it  acquired  C's  stock.  Company  A  now  purchases  all 
of  Company  B's  stock,  paying  $190,000  therefor.  According  to 
Company  B's  books  which  show  a  capital  stock  of  $100,000 
and  a  surplus  of  $50,000,  the  book  value  of  B's  stock  appears  to 
be  $150,000,  and  the  purchase  of  this  stock  by  Company  A  at 
a  price  of  $190,000  appears  to  involve  a  goodwill  element  of 
$40,000.  But  as  a  matter  of  fact  Company  B  should  have  a 
surplus  of  $75,000  and  a  total  book  value  of  $175,000,  so  that 
the  goodwill  element  is  only  $15,000. 

In  the  second  place,  the  computation  of  the  minority  interest 
will  be  facilitated  if  the  minor  holding  company  takes  up  the 
profits  of  its  subsidiary.  Returning  to  the  illustration  in  the 
preceding  paragraph,  let  us  assume  that  Company  A  bought 
only  90  per  cent  of  the  stock  of  Company  B.  There  is,  therefore, 
a  10  per  cent  minority  interest  in  Company  B.  These  minority 
stockholders  are  entitled  not  only  to  10  per  cent  of  the  profits 
from  the  minor  holding  company's  own  operations  but  also  to 
10  per  cent  of  the  profits  accruing  from  the  ownership  of  the 
subsidiary  C  stock.  The  minority  interest  in  the  surplus  of 
Company  B  is  therefore  10  per  cent  of  $75,000,  but  it  will  be 
difficult  to  show  this  fact  in  the  working  papers  if  Company 
B's  surplus  appears  at  only  $50,000. 

In  the  third  place,  the  computation  of  the  surplus  appearing 
on  the  consolidated  balance  sheet  will  be  facilitated  if  the  minor 
holding  company  has  taken  up  the  profit  of  its  subsidiary.  To 
illustrate,  assume  that  Company  A  owns  90  per  cent  of  the 


MAJOR  HOLDING  COMPANY  CONTROL         91 

stock  of  Company  B,  and  that  Company  B  owns  80  per  cent 
of  the  stock  of  Company  C.  The  surplus  on  the  consolidated 
balance  sheet  will  include:  (1)  Company  A's  earnings  from  its 
own  operations,  (2)  plus  90  per  cent  of  the  earnings  of  Company 
B  since  the  date  when  Company  A  acquired  its  stock.  These 
earnings  of  Company  B  should  include  80  per  cent  of  the  earn- 
ings of  Company  C. 

Now  if  Company  B  has  taken  up  its  earnings  from  Company 
C,  the  surplus  on  the  consolidated  balance  sheet  will  be  cor- 
rectly stated  by  merely  taking  up  90  per  cent  of  the  total  earn- 
ings of  Company  B  since  the  date  of  acquisition.  But  if  Com- 
pany B  has  not  taken  up  its  earnings  from  Company  C,  a  cor- 
rect statement  of  the  surplus  of  Company  A  will  require 
taking  up  (1)  90  per  cent  of  the  profits  from  the  operations  of 
Company  B  since  the  date  when  A  acquired  the  stock  of  B;  and 
(2)  90  per  cent  of  80  per  cent  of  the  profits  from  the  operations 
of  Company  C  since  the  date  when  A  acquired  the  stock  of  B. 

Turning  now  to  the  advantages  to  be  obtained  if  the  major 
holding  company  also  takes  up  the  profits  and  losses  of  its 
subsidiary,  it  should  be  readily  seen  that  the  major  holding 
company's  surplus  will  in  that  case  include  all  of  the  profits 
from  its  own  operations  and  from  the  ownership  of  the  stock 
of  its  subsidiaries.  For  in  taking  up  90  per  cent  of  the  earnings 
of  Company  B,  which  include  B's  share  of  the  profits  of  C,  the 
major  holding  company  has  automatically  taken  up  the  proper 
proportion  of  the  profits  of  Company  C.  The  surplus  on  the 
consolidated  balance  sheet  will  therefore  be  the  surplus  of  the 
major  holding  company  only,  and  it  will  not  be  necessary  to 
make  involved  adjustments  on  the  working  papers  to  take  up 
the  proper  proportions  of  the  profits  of  the  minor  holding  com- 
pany and  its  subsidiary. 

First  illustration:  All  inter-company  profits  taken  up. — If 
all  subsidiary  profits  have  been  taken  up  by  the  major  and  min- 
or holding  companies,  the  preparation  of  the  consolidated 
working  papers  is  a  very  simple  matter,  for  all  eliminations 
are  based  on  the  present  book  values  of  the  stock  holdings.  As 
an  illustration  assume  the  following  facts: 

1.  Company  A  owns  90  per  cent  of  the  stock  of  Company  B 

2.  Company  A  owns  20  per  cent  of  the  stock  of  Company  C 

3.  Company  B  owns  60  per  cent  of  the  stock  of  Company  C 

4.  Company  C  owns  85  per  cent  of  the  stock  of  Company  D 


92  CONSOLIDATED  STATEMENTS 

Company  A  is  therefore  the  major  holding  company,  for  it 
controls  the  entire  organization.  Company  B  is  a  minor  hold- 
ing company,  for  it  owns  a  majority  of  the  stock  of  Company  C. 
Company  C  is  also  a  minor  holding  company,  for  it  owns  a 
majority  of  the  stock  of  Company  D. 

All  companies  have  taken  up  the  profits,  losses  and  dividends 
of  their  subsidiaries;  consequently  the  investment  accounts 
represent  the  present  book  value  of  the  stock  holdings  plus 
any  goodwill  or  minus  any  negative  goodwill  involved  in  the 
stock  purchases.  Therefore  eliminations  will  be  based  on  pres- 
ent book  values.  Following  are  the  balance  sheets  at  De- 
cember 31,  1920. 

Assets                               Co.  A  Co.  B         Co.  C         Co.  D 
Investment  in  Stock  of  Co.  B  (90%)  $92,493 
Investment  in  Stock  of  Co.  C  (20%)      14,090 

Investment  in  Stock  of  Co.  C  (60%)  $  41,070 

Investment  in  Stock  of  Co.  D  (85%)  $34, 1 75 

Cash 37,850  60,100       31,275       $38,500 

$144,433  $101,170      $65,450       $38,500 

Liabilities 

Capital  Stock $100,000  $75,000  $50,000  $30,000 

Surplus 44,433  26,170  15,450  8,500 

$144.433  $101,170  $65,450  $38,500 

The  following  consolidated  balance  sheet  is  prepared  from 
the  working  papers  on  pages  93  and  94. 

COMPANY  A  AND  SUBSIDIARIES  B,  C  AND  D 

Consolidated  Balance  Sheet 
December  31, 1920 

Assets 

Goodwill $    5,690 

Cash 167,725 

$173,415' 
1  I  111  I        I 

Liabilities 

Minority  Interests: 

Company  B  (10%) $10,117 

Company  C  (20%) 13,090 

Company  D  (15%) 5,775   $28,982 

Capital: 

Capital  Stock 100,000 

Surplus 44,433   144,433 


$173,415 


MAJOR  HOLDING  COMPANY  CONTROL         93 


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MAJOR  HOLDING  COMPANY  CONTROL         95 

This  illustration  shows  that  when  all  of  the  holding  com- 
panies have  taken  up  their  proportions  of  subsidiary  profits, 
losses  and  dividends,  the  preparation  of  the  working  papers 
is  not  in  any  way  complicated  by  the  fact  that  the  major  hold- 
ing company  holds  its  control  of  the  organization  by  ownership 
through  a  minor  holding  company. 

The  goodwill  is  the  excess  of  the  various  investment  accounts 
over  the  present  book  value,  of  the  stock  holdings. 

The  minority  interests  are  their  proportions  of  the  capital 
stock  and  surplus  accounts  of  the  companies  in  which  they 
own  stock. 

The  surplus  appearing  on  the  consolidated  balance  sheet  is 
the  major  holding  company*s  surplus  only,  for  it  includes  the 
subsidiary  profits  taken  up. 

Second  illustration:  Inter-company  profits  not  taken  up. — 
To  illustrate  the  simplest  method  of  preparing  consolidated 
balance  sheet  working  papers  when  the  major  and  minor  hold- 
ing companies  have  carried  their  investment  accounts  at  cost, 
the  same  group  of  companies  will  be  used  as  in  the  first  illustra- 
tion. It  will  now  be  assumed,  however, that  no  subsidiary  profits 
have  been  taken  up;  the  investment  accounts  are  all  carried 
at  cost;  and  dividends  received  from  subsidiaries  have  been 
credited  to  surplus.  All  essential  facts  will  be  restated  so  that 
reference  to  the  preceding  illustration  will  not  be  necessary. 

The  various  stock  purchases  were  made  at  dates  and  prices 
as  follows: 

1.  At  January  1,  1918,  Company  A  purchased  80  per  cent  of 
the  stock  of  Company  B,  paying  $85,000. 

2.  At  January  1,  1919,  Company  B  purchased  60  per  cent  of 
the  stock  of  Company  C,  paying  $45,000. 

3.  At  January  1,  1920,  Company  A  purchased  10  percent  of 
the  stock  of  Company  B,  paying  $10,000. 

4.  At  January  1,  1920,  Company  A  purchased  20  per  cent  of 
the  stock  of  Company  C,  paying  $14,000. 

5.  At  January  1,  1920,  Company  C  purchased  85  per  cent  of 
the  stock  of  Company  D,  paying  $38,000. 

Following  are  the  balance  sheets  of  the  four  companies  at 
December  31,  1920.  These  are  the  same  balance  sheets  as 
before,  except  that  the  investment  accounts  are  carried  at 
cost,  and  the  surplus  accounts  are  different  because  the  holding 
companies  have  taken  up  subsidiary  dividends  as  profits  instead 


96  CONSOLIDATED  STATEMENTS 

o£  crediting  surplus  with  subsidiary  profits  and  charging  it 
with  subsidiary  losses. 

Assets  Co.  A         Co.  B         Co.  C         Co.  D 

Investment  in  Stock  of  Co.  B  (90%)  Cost  $95,000 
Investment  in  Stock  of  Co.  C  (20%)  Cost  14,000 
Investment  in  Stock  of  Co.  C  (60%)  Cost  $45,000 

Investment  in  Stock  of  Co.  D(85%)  Cost  $38,000 

Cash 37,850        60,100        31,275       $38,500 

$146,850     $105,100      $69,275       $38,500 

Liabihies 

Capital  Stock $100,000      $75,000      $50,000      $30,000 

Surplus 46,850        30,100         19,275  8,500 

$146,850     $105,100      $69,275       $38,500 


The  fact  that  the  investment  accounts  are  carried  at  cost 
makes  the  preparation  of  the  consolidated  working  papers 
far  more  difficult  than  in  the  preceding  illustration.  In  the 
first  place,  Companies  B,  C  and  D  all  have  minority  interests; -^ 
these  minority  stockholders  are  entitled  to  their  proportions  of 
the  true  surplus  of  the  respective  companies.  But  in  the  case 
of  Companies  B  and  C,  the  surplus  accounts  do  not  represent 
the  true  surplus  because  these  minor  holding  companies  have 
credited  surplus  with  dividends  received  from  their  subsidiaries 
rather  than  with  the  profits  earned  by  the  subsidiaries  since' 
the  dates  of  acquisition.  If  the  dividends  have  exceeded  the 
profits  earned  during  the  period  of  ownership,  the  surplus 
accounts  are  over-stated;  if  the  profits  earned  by  the  sub- 
sidiaries have  exceeded  the  dividends  paid  by  them,  the  surplus 
accounts  of  the  holding  companies  are  under-stated. 

In  the  second  place,  the  consoHdated  balance  sheet  must 
show  the  true  surplus  of  Company  A,  but  the  surplus  account 
in  Company  A's  balance  sheet  does  not  represent  the  true 
surplus  of  Company  A  for  the  same  reason  that  the  surplus 
accounts  of  Companies  B  and  C  do  not  represent  their  true 
surplus;  Company  A  has  taken  up  dividends  instead  of  taking 
up  the  profits  and  losses  of  its  subsidiaries. 

The  first  step  in  the  preparation  of  consolidated  working 
papers  will  therefore  be  the  ascertaining  of  the  true  surplus, 
accounts  of  the  several  companies^  This  will  be  accomplished 
by  building  up  a  statement  showing  what  the  several  surplus 
accounts  would  be  if  each  company  had  taken  up  subsidiary 


MAJOR  HOLDING  COMPANY  CONTROL         97 

profits  and  losses  instead  of  subsidiary  dividends.  Having 
ascertained  these  true  surplus  balances,  adjustments  will  be 
made  on  the  working  papers  to  raise  or  lower  the  surplus  ac- 
counts to  the  true  balances.  That  is,  if  subsidiary  profits 
have  exceeded  dividends,  surplus  will  be  credited;  the  off- 
setting debit  will  be  made  against  the  investment  accounts  to 
adjust  them  to  the  balances  which  they  would  have  if  the 
holding  companies  had  followed  the  correct  accounting  pro- 
cedure. On  the  other  hand,  if  subsidiary  dividends  have  ex- 
ceeded subsidiary  profits,  the  holding  companies'  surplus  ac- 
counts will  be  debited  for  the  excess  of  the  dividends  over  the 
profits;  and  the  offsetting  credits  will  be  made  in  the  invest- 
ment accounts  to  reduce  them;  this  reduction  is  necessitated  by 
the  fact  that  dividends  in  excess  of  profits  reduce  the  value  of 
the  subsidiary  net  assets  and  hence  reduce  the  value  of  the 
investments. 

Having  made  the  adjustments  indicated  above,  the  invest- 
ment accounts  and  surplus  accounts  will  have  been  adjusted 
to  the  same  basis  as  in  the  preceding  illustration,  and  elimina- 
tions can  be  made  on  the  basis  of  present  book  values,  as  in  the 
preceding  illustration. 

The  following  statement  shows  the  operating  profits  and 
losses  of  the  four  companies  from  January  1,  1918,  to  December 
31,  1920,  as  well  as  the  credits  to  surplus  for  subsidiary  div- 
idends taken  up,  and  the  debits  to  surplus  for  dividends  paid. 
The  final  balances  agree  with  the  surplus  balances  shown  in  the 
balance  sheet  on  page  96. 


98  CONSOLIDATED  STATEMENTS 

STATEMENT  OF  SURPLUS  ACCOUNTS  PER  BOOKS 

(Subsidiary  Profits  and  Losses  Not  Taken  Up,  but  Subsidiary  Dividends 
Received  Treated  as  Income) 

Co.  A  Co.  B  Co.  C         Co.  D 

Surplus,  January  1, 1918 $25,000  $30,000  $20,000        $5,000 

Profits  of  1918: 

From  operations 10,000  3,000*  5,000          6,000 

Dividends  received 3,600 

Total $38,600  $27,000  $25,000       $11,000 

Less  Dividends  paid 6,000  4,500  3,000          1,500 

Surplus,  December  31, 1918 $32,600  $22,500  $22,000        $9,500 

Profits  of  1919: 

From  operations 8,000  5,000  4,000*         5,000 

Dividends  received 3,600  1,800 

Total $44,200  $29,300  $18,000       $14,500 

Less  Dividends  paid 6,000  4,500  3,000           1,500 

Surplus,  December  31, 1919 $38,200  $24,800  $15,000       $13,000 

Profits  of  1920: 

From  operations 10,000  8,000  6,000          3,000* 

Dividends  received: 

From  Co.  B 4,050 

From  Co.  C 600  1,800 

From  Co.  D 1,275 

Total $52,850  $34,600  $22,275       $10,000 

Less  Dividends  paid 6,000  4,500  3,000          1,500 

Surplus,  December  31, 1920 $46,850  $30,100  $19,275         $8,500 


The  following  Statement  of  Adjusted  Surplus  and  Invest- 
ment Accounts  shows  the  method  of  arriving  at  the  necessary 
adjustments.  This  statement  is  built  up  from  the  foregoing 
statement  of  surplus  accounts,  and  shows  the  entries  in  surplus 
and  investment  accounts  which  should  have  been  made  by  the 
several  companies  to  record  profits,  losses  and  dividends  in 
the  proper  manner.  At  the  end  of  the  statement  there  are 
shown  the  surplus  and  investment  account  balances  which 
result  from  a  proper  accounting  method;  by  comparing  these 
balances  with  the  balances  per  the  companies'  books  the  neces- 
sary adjustments  are  ascertained. 


MAJOR  HOLDING  COMPANY  CONTROL         99 


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Chapter  XIII 
UNREALIZED  INTER-COMPANY  PROFITS 

Profits  in  inventories. — ^When  one  constituent  company  sells 
goods  at  a  profit  to  another  constituent  company,  the  minority 
stockholders  of  the  selling  company  have  a  right  to  consider 
that  the  profit  has  been  realized  since  the  goods  have  been  sold 
to  a  company  in  which  they  have  no  interest.  The  holding 
company  which  controls  the  organization  and  which  looks 
upon  the  various  subsidiaries  virtually  as  departments  of  the 
organization,  should  not  consider  the  profit  as  realized  until 
the  goods  have  been  resold  to  a  purchaser  outside  of  the 
organization. 

Therefore,  if,  at  the  date  of  the  consolidated  balance  sheet, 
the  inventories  of  any  of  the  related  companies  contain  goods 
which  have  been  purchased  from  another  related  company 
after  the  combination  was  effected,  the  inventories  should  be 
analyzed  to  determine  how  much  of  their  present  cost  or  carry- 
ing value  is  composed  of  profits  added  by  the  selling  com- 
panies. After  this  unrealized  profit  has  been  ascertained  a 
reserve  should  be  created  out  of  the  holding  company's  surplus 
for  the  holding  company's  portion  of  such  unrealized  profit. 

To  illustrate,  it  will  be  assumed  that  Company  A  owns  90 
per  cent  of  the  stock  of  Company  B.  Company  B  has  sold  goods 
to  Company  A  during  the  year  at  a  profit,  and  the  inventory  of 
Company  A  at  the  end  of  the  year  includes  goods  purchased 
from  Company  B  on  which  the  latter  company  made  a  profit 
of  $1,000.  Since  Company  A,  in  taking  up  its  share  of  the 
profits  of  Company  B,  has  taken  up  $900  of  this  profit,  a  reserve 
should  be  created  by  deducting  $900  from  the  holding  com- 
pany's surplus  and  transferring  it  to  a  reserve. 

Position  of  reserve  on  the  balance  sheet. — There  are  two 
possible  methods  of  showing  the  reserve  for  unrealized  profits 
on  the  consolidated  balance  sheet.  The  first  is  as  a  deduction 
from  inventories,  and  the  second  is  on  the  liability  side  under 
the  caption  of  reserves.    The  former  method  is  usually  em- 

103 


104  CONSOLIDATED  STATEMENTS 

ployed  and  Is  theoretically  correct,  for  inventories  should  be 
priced  at  cost  (unless  market  is  lower)  and  cost  should  not 
include  the  organization's  share  of  unrealized  profits  resulting 
from  transfers  from  one  related  company  to  another. 

Conflicting  opinions  as  to  amotint  of  reserve. —  Some  ac- 
countants set  up  a  reserve  for  the  entire  amount  of  the  unreal- 
ized profit  instead  of  for  the  holding  company's  proportion 
thereof.  This  is  permissible  for  tax  purposes,  for  the  tax  law 
views  the  related  companies  as  a  unit  without  consideration  of 
minority  interests.  But  the  commercial  purpose  of  a  consol- 
idated balance  sheet  is  to  show  the  interests  of  the  holding 
company's  stockholders  and  the  minority  stockholders  in  the 
total  assets  of  the  consolidation.  From  the  commercial  view- 
point, the  minority  stockholders  are  outsiders  and  their  share 
of  the  profit  is  earned  as  soon  as  the  goods  are  sold  to  another 
corporation  in  which  they  have  no  interest. 

Complications  in  computation  of  reserve. — When  the  organ- 
ization is  composed  of  a  number  of  companies,  the  computation 
of  the  reserve  for  unrealized  profits  in  inventories  may  be  com- 
plicated by  the  fact  that: 

1.  The  profits  are  made  by  a  subsidiary  of  a  minor  holding 
company; 

2.  The  profits  are  cumulative. 

The  essential  principle  to  bear  in  mind  is  that,  so  far  as  the 
minority  interest  of  the  company  making  the  profit  by  sale  or 
service  is  concerned,  the  profit  is  earned,  but  the  holding  com- 
pany taking  up  the  profit  should  set  up  a  reserve  for  its  pro-rata 
share  of  the  portion  which  has  not  been  realized  by  sales  out- 
side the  organization. 

Profits  of  subsidiary  of  minor  holding  company. — ^Three 
illustrations  will  be  given  to  show  the  method  of  determining 
the  amount  of  the  reserve. 

First  illustration:  A  owns  all  of  B;  B  owns  90  per  cent  of  C. 
B's  inventory  contains  unrealized  profits  of  $1,000  on  goods 
purchased  from  C.  Since  B  has  taken  up  90  per  cent  of  the 
unrealized  profit,  and  A  has  taken  up  the  same  amount  by 
taking  up  all  of  B's  profit,  a  reserve  of  90  per  cent  of  $1,000,  or 
$900,  should  be  set  up. 

Second  illustration:  A  owns  80  per  cent  of  B;  B  owns  90 
per  cent  of  C.  A's  inventory  contains  unrealized  profits  of 
$1,000  on  goods  purchased  from  C.    Since  B  has  taken  up  90 


UNREALIZED  INTER-COMPANY  PROFITS     105 

per  cent  of  the  unrealized  profit  made  by  C,  and  A  has  taken  up 
80  per  cent  of  B's  90  per  cent  in  taking  up  its  share  of  B's  profit, 
the  reserve  should  be  80  per  cent  of  90  per  cent  of  $1,000,  or 
$720. 

Third  illustration :  A  owns  80  per  cent  of  B  and  10  per  cent  of 
C;  B  owns  90  per  cent  of  C.  A's  inventory  contains  unrealized 
profits  of  $1,000  on  goods  purchased  from  C.  B  has  taken  up 
90  per  cent  of  the  unrealized  profit,  and  A  has  taken  up  80  per 
cent  of  this  90  per  cent  in  taking  up  its  share  of  B's  profit.  A 
has  also  taken  up  10  per  cent  of  the  unrealized  profit  by  taking 
up  its  share  of  C's  profit.  Since  A  has  taken  up  72  per  cent  plus 
10  percent  of  the  unrealized  profit,  it  should  set  up  a  reserve  for 
82  percent  or  $820.  The  remaining  $180  is  properly  included 
in  the  minority  interest  of  Company  B;  these  stockholders  own 
20  per  cent  of  Company  B  which  has  taken  up  90  per  cent  of  the 
profit,  and  this  profit  is  realized  to  the  minority  of  Company  B 
since  they  are  outsiders  so  far  as  concerns  the  organization  con- 
trolled by  Company  A. 

Cumulative  profits. — ^As  an  illustration  of  cumulative  un- 
realized profits  in  inventories,  it  will  be  assumed  that  Company 
A  owns  90  per  cent  of  the  stock  of  Company  B,  while  Company 
B  owns  80  per  cent  of  the  stock  of  Company  C.  The  inventory 
of  Company  A  contains  goods  which  were  put  through  one 
process  by  Company  C  and  sold  to  Company  B  at  a  profit  of 
$800;  Company  B  put  them  through  another  process  and  sold 
them  to  Company  A  at  a  profit  of  $1,200.  The  reserve  is  com- 
puted as  follows: 

Company  C's  profits: 

90%  of  80%  of  $800 $  576 

Company  B's  profits: 

90%  of  $1,200 1,080 

Total  reserve $1,656 


Profits  from  sales  before  combination. — If  the  inventories 
contain  goods  which  were  sold  by  one  company  to  another 
before  the  holding  company  acquired  control  of  the  selling 
company,  no  reserve  should  be  created  because  the  holding 
company  did  not  take  up  a  share  of  such  profits  and  should  not 
be  required  to  reduce  its  surplus  by  an  amount  which  has  not 
been  included  therein.    The  companies  were  not  related  when 


106  CONSOLIDATED  STATEMENTS 

the  sale  took  place,  and  hence  the  profit  is  not  inter-company 
profit. 

Inter-company  profits  in  construction. — When  one  related 
company  produces  fixed  assets  for  another  company  and  makes 
a  profit  on  the  construction,  a  resei^ve  should  be  created  to 
eliminate  the  holding  company's  proportion  of  such  profit  and 
reduce  the  fixed  assets  to  cost.  As  already  shown  in  connection 
with  inventories,  the  cost  may  properly  include  the  profit  made 
by  the  minority  stockholders  of  the  selHng  company.  The  hold- 
ing company  can  not  equitably  ask  the  minority  stockholders 
of  its  subsidiary  to  forego  their  share  of  the  profit  on  work  done 
for  a  company  in  which  they  have  no  interest. 

To  illustrate,  assume  that  Company  A  owns  90  per  cent  of 
the  stock  of  Company  B.  After  the  combination  is  effected, 
the  latter  company  sells  fixed  assets  to  Company  A  at  a  profit 
of  $1,000.  At  the  end  of  the  year,  Company  A  will  take  up 
$900  of  the  profit  which  Company  B  made  on  the  sale,  and  it 
should  therefore  create  a  reserve  of  $900  for  unrealized  profit 
in  fixed  assets. 

The  question  of  inter-company  profits  on  construction  of 
fixed  assets  is  a  much  more  complex  one  than  that  of  inter- 
company profits  in  inventories.  Inter-company  profits  in 
inventories  will  become  realized  profits  when  the  goods  are  sold 
to  outsiders  and  the  reserve  will  disappear  when  the  goods  are 
disposed  of.  In  the  case  of  fixed  assets,  however,  the  property 
is  not  ordinarily  disposed  of  through  sale,  and  it  might  seem 
therefore  that  the  reserve  should  be  kept  intact  and  appear  as  a 
deduction  on  the  balance  sheet  at  the  original  amount  so  long 
as  the  fixed  assets  are  owned.  But  it  should  be  remembered 
that  the  fixed  assets  are  virtually  disposed  of  gradually  through 
use  and  depreciation,  and  it  would  therefore  seem  logical  to 
reduce  the  depreciation  charges  to  a  basis  of  inter-company 
cost.  This  view  is  strengthened  when  it  is  remembered  that 
depreciation  should  be  based  on  cost,  and  that  cost  cannot  be 
two  different  things  for  two  different  purposes.  If  cost  for 
balance  sheet  purposes  is  purchase  price  less  inter-company 
profit,  then  cost  for  depreciation  purposes  should  be  the  same 
amount.  If  manufacturing  expense  is  charged  with  deprecia- 
tion on  the  purchase  price,  the  costs  of  manufacture  will  be 
over-stated  since  depreciation  will  have  been  computed  on  a 
value  in  excess  of  the  cost  to  the  organization. 

It  is  not  difficult  to  put  this  theory  into  practice  if  the  hold- 


UNREALIZED  INTER-COMPANY  PROFITS     107 

ing  company  owns  the  asset  on  which  the  inter-company  profit 
was  made.    Two  methods  are  available: 

1.  The  holding  company  may  write  down  the  asset  to  inter- 
company cost  by  debiting  surplus  and  crediting  the  asset 
account  instead  of  crediting  a  reserve  for  inter-company  profit. 
Depreciation  will  then  be  computed  on  the  carrying  value  of 
the  property  as  shown  by  the  asset  account. 

2.  The  holding  company  may  carry  the  reserve  and  compute 
depreciation  on  the  carrying  value  of  the  property  as  measured 
by  the  debit  balance  in  the  asset  account  minus  the  credit 
balance  in  the  reserve  for  inter-company  profit. 

To  illustrate,  assume  that  Company  A  owns  90  per  cent  of 
the  stock  of  Company  B,  and  that  during  the  year  Company 
B  manufactured  for  Company  A  machinery  which  it  delivered 
to  them  at  the  end  of  the  year,  billing  them  at  $25,000.  The 
profit  made  by  Company  B  was  $5,000.  Company  A  took  up 
90  per  cent  of  this  amount,  or  $4,500,  in  taking  up  its  share  of 
the  profits  of  Company  B.  If  Company  A  follows  the  first 
method  suggested  above,  it  will  debit  its  surplus  and  credit 
the  machinery  account  $4,500,  thus  reducing  the  asset  to 
$20,500  which  is  inter-company  cost  after  allowing  the  minority 
stockholders  of  Company  B  their  10  per  cent  of  the  profit. 
Depreciation  will  then  be  computed  on  $20,500.  If  Company 
A  follows  the  second  method  suggested  above,  it  will  debit 
surplus  and  credit  a  reserve  for  unrealized  profit  in  fixed  assets 
$4,500;  it  will  then  compute  depreciation  on  the  $25,000  balance 
of  the  asset  account  minus  the  $4,500  balance  of  the  reserve  for 
inter-company  profit. 

The  theory  is  not  so  easily  put  into  practice  if  the  company 
making  the  profit  sold  the  assets  to  another  affiliated  company 
instead  of  to  the  holding  company.  To  illustrate,  assume  that 
Company  A  owns  90  per  cent  of  the  stock  of  Company  B  and 
80  per  cent  of  the  stock  of  Company  C.  Company  C  has  sold 
machinery  to  Company  B  for  $50,000  which  cost  $40,000. 
When  Company  A  takes  up  its  80  per  cent  of  the  profits  of 
Company  C,  it  takes  up  $8,000  of  this  unrealized  inter-company 
profit  and  should  therefore  create  a  reserve  of  $8,000.  The 
first  method  suggested  above  is  not  practicable  in  this  case;  the 
asset  is  on  Company  B's  books  while  the  unrealized  profit  must 
be  taken  out  of  Company  A's  surplus.  It  is  impossible  to  write 
down  the  asset  on  Company  B's  books,  because  that  would 
involve  a  debit  to  Company   B's  surplus  which  would   be 


108  CONSOLIDATED  STATEMENTS 

improper,  because  the  inter-company  profit  went  into  A's 
surplus  and  not  into  B's.  The  asset  will  therefore  go  on  B's 
books  at  $50,000,  and  the  reserve  will  be  set  up  at  $8,000  on 
A's  books. 

For  consolidated  balance  sheet  purposes  the  cost  of  the  asset 
was  $42,000,  but  Company  B  will  compute  depreciation  on  a 
basis  of  $50,000,  which  was  the  cost  to  Company  B  as  a  sepa- 
rate corporation.  If  the  rate  of  depreciation  is  10  per  cent,  the 
depreciation  on  a  straight  line  basis  will  be  $5,000  annually. 
But  from  the  standpoint  of  the  organization  as  a  unit  Com- 
pany B  has  over-stated  its  manufacturing  costs  by  10  per  cent 
of  $8,000  or  $800,  and  if  all  of  the  goods  manufactured  by 
Company  B  during  the  year  have  been  sold  outside  the  organ- 
ization the  profits  of  the  organization  have  been  under-stated 
$800.  In  other  words,  according  to  the  theory  which  makes 
depreciation  a  manufacturing  expense,  10  per  cent  of  the  ma- 
chinery has  now  been  converted  into  finished  goods  and  sold. 
Ten  per  cent  of  the  unrealized  profit  on  fixed  assets  is  thereby 
realized  by  converting  the  fixed  assets  into  finished  goods  and 
selling  them.  The  holding  company  A  would  therefore  be 
justified,  in  the  author's  opinion,  in  transferring  10  per  cent  of 
the  $8,000  reserve  or  $800  to  its  surplus  account,  thus  reducing 
the  reserve  on  the  holding  company's  books  to  $7,200.  The 
asset  would  then  appear  on  the  consolidated  balance  sheet  as 
follows : 

Machinery $50,000 

Less  Reserve  for  inter-company  profit  on  construction . . .     $7,200 

Reserve  for  depreciation 5,000  12,200 


$37,800 


This  treatment  seems  theoretically  correct  since  it  produces 
the  same  result  which  would  be  produced  by  either  the  first  or 
second  method  if  the  holding  company  had  itself  purchased 
the  asset  from  Company  C.  In  that  case  Company  A  would 
carry  the  asset  on  its  own  books  at  $42,000.  The  depreciation 
at  10  per  cent  would  be  $4,200,  and  the  carrying  value  at  the 
end  of  the  first  year  would  be : 

Machinery  (at  cost  less  inter-corapany  profit) $42,000 

Less  Depreciation 4,200 

$37,800 


UNREALIZED  INTER-COMPANY  PROFITS     109 

There  is  a  still  further  complication  if  the  finished  goods  have 
not  been  sold  or  have  been  sold  to  another  company  within  the 
organization.  In  that  case  the  inter-company  profit  on  con- 
struction has  merely  been  converted  into  inter-company  profit 
in  inventories,  and,  as  this  inter-company  profit  has  not  been 
realized  by  sales  outside  the  organization,  it  should  appear  in 
the  reserve  for  inter-company  profits  in  inventories  on  the 
consoHdated  balance  sheet. 

Illustration  of  working  papers. — ^The  method  of  obtaining 
the  reserves  for  the  consolidated  balance  sheet  will  depend 
upon  whether  or  not  they  have  been  set  up  on  the  books  of  the 
holding  company.  If  they  have  been  set  up,  they  will  appear 
in  the  balance  sheet  of  the  holding  company  and  will  be  merely 
carried  out  to  the  consolidated  balance  sheet  columns.  If  they 
have  not  been  set  up  on  the  holding  company's  books,  they  will 
be  deducted  from  the  holding  company's  surplus  on  the  work- 
ing papers,  as  indicated  below: 

CONSOLIDATED  BALANCE  SHEET  WORKING  PAPERS 

Co.  A  Co.  B         Elim.        C.  B.  S. 

Surplus— Co.  A $40,000 

Reserve  for  int.-co.  profit  in  inventories  $   900  R 

Reserve  for  int.-co.  profit  in  construction  4,500  R 

Surplus 34,600  S 


Chapter  XIV 

CONSOLIDATED  PROFIT  AND  LOSS  AND  SURPLUS 
STATEMENTS 

SEPARATE    WORKING    PAPERS 

Working  papers  based  on  statements  or  trial  balances. — ^At 
the  close  of  each  accounting  period  it  is  customary  to  prepare 
a  consoHdated  profit  and  loss  statement,  a  consolidated  surplus 
statement  and  a  consolidated  balance  sheet.  There  are  two 
methods  available  for  making  the  working  papers  for  these 
statements. 

First,  they  may  be  prepared  from  the  statements  of  the  hold- 
ing company  and  its  subsidiaries  after  their  books  are  closed. 
If  this  method  is  adopted  there  will  be  a  separate  set  of  work- 
ing papers  for  the  revenue  statement,  the  surplus  statement 
and  the  balance  sheet. 

Second,  they  may  be  prepared  from  the  trial  balances  of  the 
holding  company  and  its  subsidiaries  before  the  books  are 
closed.  If  this  method  is  adopted  there  will  be  a  single  set  of 
working  papers  from  which  all  of  the  consolidated  statements 
will  be  prepared. 

The  first  method  will  be  illustrated  in  this  chapter;  the  second 
method  will  be  illustrated  in  Chapter  XV. 

Consolidated  revenue  statement — ^Working  papers. — When 
the  consolidated  revenue  statement  is  prepared  from  the  rev- 
enue statements  of  the  holding  company  and  the  subsidiaries, 
the  statement  may  be  divided  into  a  cost  of  goods  sold  state- 
ment and  a  profit  and  loss  statement,  or  both  sections  may  be 
combined  in  a  single  statement.  In  either  event,  the  working 
papers  should  contain  columns  for  each  company,  two  columns 
for  adjustments  if  necessary,  a  column  for  inter-company 
eliminations,  and  one  for  the  consolidated  figures.  The  pro- 
cedure may  be  summarized  as  follows: 

1.  Combine  all  similar  items  of  income  and  expense. 

2.  Eliminate  all  inter-company  nominal  accounts. 

All  inter-company  transactions  should  have  been  taken 

110 


PROFIT  AND  LOSS;  SURPLUS  111 

up  on  the  books  of  both  companies  which  were 
parties  to  the  transaction.  If  they  have  not  been 
taken  up,  adjustments  will  be  required  in  the  working 
papers. 

3.  Make  adjustments  for  inter-company  profits  as  follows: 

a.  Profits  in  inventories  at  the  beginning  of  the  period, 
— (1)  If  the  beginning  of  the  period  was  also  the 
date  of  acquisition,  make  no  adjustment  as  the 
profits  were  not  inter-company  profits.  (2)  If  the 
beginning  of  the  period  was  subsequent  to  the  date 
of  acquisition,  make  adjustment  by  reducing  the  in- 
ventories; this  adjustment  is  equivalent  to  a  credit 
to  cost  of  sales  (since  the  opening  inventories  are 
debited  to  cost  of  sales)  and  a  debit  to  the  holding 
company's  surplus  as  of  the  beginning  of  the  period. 
Only  the  credit  will  be  shown  in  the  revenue  state- 
ment working  papers;  the  debit  will  appear  in  the 
surplus  statement  working  papers. 

b.  Profits  in  inventories  at  the  end  of  the  period. — 
Make  adjustment  by  reducing  the  inventories;  this 
adjustment  is  equivalent  to  a  debit  to  cost  of  sales 
since  the  closing  inventories  are  credited  to  cost  of 
sales,  and  a  credit  to  reserve  for  inter-company  profit 
in  inventories.  Only  the  debit  will  be  shown  in  the 
revenue  statement  working  papers. 

c.  Profit  on  construction  during  the  period. — Adjust 
by  a  reduction  of  the  nominal  account  showing  the 
profit;  this  adjustment  is  equivalent  to  a  debit  to 
the  income  account  and  a  credit  to  the  reserve. 

4.  From  the  total  consolidated  net  profit: 

Deduct  the  minority  interests  in  the  profits  of  the  sub- 
sidiaries, to  obtain  the  net  increase  or  decrease  in 
the  profits  of  the  holding  company. 

Consolidated  surplus  statement — ^Working  papers. — When 
the  consolidated  surplus  statement  is  prepared  from  the  sur- 
plus statements  of  the  holding  company  and  the  subsidiaries, 
the  working  papers  should  contain  columns  for  each  company, 
two  columns  for  adjustments  if  necessary,  a  column  for  in- 
ter-company eliminations,  a  column  for  the  minority  interest  in 
the  surplus  accounts  of  the  subsidiaries,  and  a  column  for  the 
consolidated  surplus  figures.  The  procedure  may  be  sum- 
marized as  follows: 

1.    Enter  the  holding  company's  surplus  as  of  the  beginning 
of  the  period;  make  adjustment  for  any  inter-company 


112  CONSOLIDATED  STATEMENTS 

profits  in  inventories  at  the  beginning  of  the  period 
which  were  not  provided  for  on  the  books  of  the  holding 
company.  Carry  the  adjusted  surplus  to  the  consoli- 
dated surplus  column. 

2.  Enter  the  surplus  of  each  subsidiary  as  of  the  beginning 

of  the  period. 

a.  Carry  the  minority  interests  thereof  to  the  minority 
column. 

b.  If  the  holding  company  has  followed  the  procedure 
of  taking  up  its  share  of  subsidiary  profits  and  losses, 
eliminate  the  holding  company's  percentage  of  the 
subsidiary's  surplus  at  the  beginning  of  the  period. 

c.  If  the  holding  company  has  carried  the  investment 
account  at  cost,  eliminate  the  holding  company's 
percentage  of  the  surplus  at  the  date  of  acquisition, 
and  carry  to  the  consolidated  surplus  column  the 
holding  company's  percentage  of  the  increase  or 
decrease  in  subsidiary  surplus  since  the  date  of 
acquisition. 

3.  Foot  the  consolidated  surplus  column;   the  total  should 

be  the  consolidated  surplus  of  the  organization  at  the 
beginning  of  the  period,  and  should  tie  up  with  the 
surplus  appearing  on  the  consolidated  balance  sheet 
prepared  at  that  date. 

4.  Enter  the  earnings  of  each  company,  the  earnings  of  the 

minority  and  the  consolidated  earnings  for  the  year, 
as  shown  by  the  consolidated  profit  and  loss  statement 
working  papers. 

5.  Enter  the  dividends  of  each  company,  eliminate  inter- 

company dividends,  deduct  dividends  paid  to  minority 
holders  in  the  minority  column,  and  deduct  dividends 
paid  by  the  holding  company  in  the  consolidated 
column. 

The  balance  of  the  minority  column  should  be  the  minority's 
interest  in  the  surplus  of  the  subsidiaries,  and  the  balance  of 
the  consolidated  column  should  be  the  consolidated  surplus  at 
the  end  of  the  period  and  should  tie  up  with  the  surplus  shown 
in  the  consolidated  balance  sheet. 

Outline  of  illustrations  of  separate  working  papers. — ^The 
procedure  of  preparing  working  papers  depends  as  indicated 
in  paragraph  2  of  the  preceding  section,  upon  whether  the 
holding  company  carries  its  investment  account  at  cost  or  takes 
up  its  share  of  subsidiary  profits  and  losses.  It  also  depends 
upon  whether  the  subsidiaries  have  paid  any  dividends  during 


PROFIT  AND  LOSS;  SURPLUS  113 

the  period.    The  following  illustrations  will  indicate  the  pro- 
cedure under  various  combinations  of  these  conditions. 

Group  I.  Subsidiary  profits  and  losses  up  to  beginning  of 
period  taken  up  by  holding  company: 

First  illustration:  No  dividends  paid  by  subsidiaries. 
Second  illustration:   Dividends  paid  by  subsidiaries  taken 
up  by  holding  company  as  credit  to  Investment  account. 

Group  II.     Investment  carried  at  cost: 

Third  illustration:  No  dividends  paid  by  subsidiaries. 
Fourth  illustration:   Dividends  paid  by  subsidiaries  taken 
up  by  the  holding  company  as  a  credit  to  Profit  and  Loss. 

First  illustration:  Consolidated  profit  and  loss  statement. — 
At  December  31, 1921,  Company  A  owns  90  per  cent  of  the  stock 
of  Company  B,  which  it  purchased  five  years  prior,  and  80  per 
cent  of  the  stock  of  Company  C,  which  it  purchased  at  January 
1,  1921.  Following  are  the  revenue  statements  of  the  three 
companies  for  the  year  1921: 

COMPANY  A  AND  SUBSIDIARIES  B  AND  C 

Profit  and  Loss  Statements  {Exhibit  A) 

For  the  Year  Ending  December  31,  1921 

Co.  A         Co.  B         Co.  C 

Gross  Sales $300,000     $225,000     $120,000 

Less  Returned  Sales  and  Allowances 3,000  2,000  1,000 

Net  Sales 297,000       223,000       119,000 

Less  Cost  of  Goods  Sold  (Exhibit  B) 215,000       175,000        80,000 

Gross  Profit  on  Sales 82,000        48,000        39,000 

Less  Selling  Expenses 23,000        22,000        15,000 

Net  Profit  on  Sales 59,000        26,000        24,000 

Less  General  and  Administrative  Expenses 22,000         11,000  3,000 

Net  Profit  on  Operations 37,000        15,000        21,000 

Add  Miscellaneous  Income: 

Rent  of  Equipment  to  Company  B 3,000 

Bond  Interest  Received  from  Company  C. . .  2,000 

Total •     40,000        17,000        21,000 

Less  Bond  Interest  Paid 6,000  2,500 

Net  Profit  for  the  Year $34,000      $17,000     [$18,500 


114 


CONSOLIDATED  STATEMENTS 


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PROFIT  AND  LOSS;  SURPLUS  115 

Company  C  does  no  manufacturing,  but  deals  only  in  raw 
materials,  selling  to  outsiders  and  to  Companies  A  and  B. 
Both  Company  B  and  Company  A  manufacture;  Company  B 
sells  to  Company  A  and  to  outsiders;  Company  A  sells  to  out- 
siders only. 

Company  A  has  taken  up  its  share  of  the  profits  of  Com- 
pany B  in  prior  years,  but  has  taken  up  no  subsidiary  profits 
for  1921.  Therefore  Company  A's  profit  and  loss  statement 
contains  no  figures  for  subsidiary  profits  or  dividends. 

The  inventories  at  January  1,  1921,  contained  inter-company 
profits  made  by  sales  between  companies  as  follows  : 

Profit  Made    Profit  Made 
Company  A's  Inventories:  by  Co.  B         by  Co.  C 

Raw  Materials $2,000  $1,000 

Goods  in  Process 1,500  800 

Company  B's  Inventories: 

Raw  Material 500 

Goods  in  Process 800 

Finished  Goods 250 

The  inventories  at  December  31,  1921,  contained  profits 
made  by  sales  between  companies  as  follows: 

Profit  Made    Profit  Made 
Company  A's  Inventories:  by  Co.  B         by  Co.  C 

Raw  Materials $2,500  $1,200 

Goods  in  Process 800  200 

Finished  Goods 1,800  1,500 

Company  B's  Inventories: 

Raw  Materials 500 

Goods  in  Process 1,000 

Finished  Goods 1,300 

Company  C  sold  $60,000  worth  of  goods  to  Company  B 
during  the  year  and  $35,000  worth  to  Company  A.  Com- 
pany B  sold  $75,000  worth  to  Company  A.  Following  are  the 
working  papers  and  the  consolidated  statements. 

The  first  step  is  to  ascertain  the  adjustments  to  be  made  in 
the  working  papers  for  inter-company  profits  in  inventories. 
Since  Company  C  was  not  a  part  of  the  organization  prior  to 
January  1,  1921,  the  profits  which  it  made  on  sales  to  Company 
A  and  Company  B  prior  to  that  date  were  not  inter-company 
profits,  and  hence  are  ignored.  The  profit  made  by  Company 
B  on  the  goods  in  Company  A's  inventories  at  January  1,  1921, 


116  CONSOLIDATED  STATEMENTS 

must  be  considered.  Company  A's  inventory  at  January  1 
contained  goods  on  which  Company  B  had  made  a  profit  of 
$3,500.  Since  Company  A  owns  90  per  cent  of  the  stock  of 
Company  B  the  reserve  at  January  1,  1921,  will  be  $3,150. 
Of  this  total,  $1,800  will  be  deducted  from  the  inventory 
of  raw  materials,  and  $1,350  from  the  inventory  of  goods 
in  process. 

The  reserves  for  inventories  at  December  31,  1921,  are  com- 
puted as  follows: 

Company  A: 

Raw  Materials: 

90%  of  $2,500  profit  made  by  Co,  B $2,250 

80%  of   1,200  profit  made  by  Co.  C 960  $3,210 

Goods  In  Process: 

90%  of  $800  profit  made  by  Co.  B 720 

80%  of  200  profit  made  by  Co.  C 160  880 

Finished  Goods: 

90%  of  $1,800  profit  made  by  Co.  B 1,620 

80%  of   1,500  profit  made  by  Co.  C 1,200  2,820 

Company  B: 

Raw  Materials: 
80%  of  $500  profit  made  by  Co.  C 400 

Goods  in  Process: 
80%  of  $1,000  profit  made  by  Co.  C 800 

Finished  Goods: 
80%  of  $1,300  profit  made  by  Co.  C 1,040 

$9,150 


The  unrealized  profit  is  summarized  by  inventories  as  follows 

Co.  A's       Co.  Fs 

Inventory    Inventory        Total 

Raw  Materials $3,210         $   400         $3,610 

Goods  in  Process 880  800  1,680 

Finished  Goods 2,820  1,040  3,860 

Total  reserve  at  December  31,  1921 $9,150 

After  computing  these  adjustments  for  inter-company  profits 
in  inventories,  the  consolidated  working  papers  may  be  drawn 
up.  The  working  papers  for  cost  of  sales  are  prepared  in  the 
following  form: 


PROFIT  AND  LOSS;  SURPLUS 


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COMPANY  A  AND  SUBSIDIARIES  B  AND  C 

Consolidated  Profit  and  Loss  Statement — Working  Papers 

For  the  Year  Ending  December  31, 1921 

Co.  A        Co.  B        Co.  C        Elim.      Consolidated 

P.  y  L. 

Gross  Sales $300,000  $225,000  $120,000  $170,000(A)  $475,000 

Less  Returned  Sales  and  Allow- 
ances   3,000  2,000  1,000  6,000 

Net  Sales 297,000  223,000  119,000  469,000 

Less  Cost  of  Goods  Sold 215,000  175,000  80,000  303,000 

Gross  Profit  on  Sales 82,000  48,000  39,000  166,000 

Less  Selling  Expenses 23,000  22,000  15,000  60,000 

Net  Profit  on  Sales 59,000  26,000  24,000  106,000 

Less  General  and  Administrative 

Expenses 22,000  11,000  3,000  36,000 

Net  Profit  on  Operations 37,000  15,000  21,000  70,000 

Add  Miscellaneous  Income: 

Rent  of  Equipment  to  Co.  B.         3,000  3,000(B) 

Bond  Interest  from  Co.  C...  2,000    2,000(C) 

Total 40,000  17,000  21,000                           70,000 

Less  Bond  Interest  Paid 6,000    2,500       2,000(C)         6,500 

Net  Profit  for  the  Year $34,000  $17,000  $18,500                         $63,500 

Minority  Interests: 

Company  B  (10%) 1,700 

Company  C  (20%) 3,700 

Total 5,400 

Holding  Company's  Earnings . .  $58,100 

COMPANY  A  AND  SUBSIDIARIES  B  AND  C 
Consolidated  Statement  of  Cost  of  Goods  Sold 

For  the  Year  Ending  December  31,  1921  {Exhibit  A) 

Goods  in  Process,  January  1,  1921 $  53,650 

Materials: 

Inventory,  January  1,  1921 $  68,200 

Add  Purchases 146,000 

Total 214,200 

Deduct  Inventory,  December  31,  1921 82,390 

Materials  Used 131,810 

Direct  Labor 150,000 

Manufacturing  Expense 107,000     388,810 

Total 442,460 

Deduct  Goods  in  Process,  December  31,  1921 78,320 

Cost  of  Goods  Manufactured 364,140 

Add  Inventory  of  Finished  Goods,  January  1,  1921 30,000 

Total 394,140 

Deduct  Finished  Goods  Inventory,  December  31,  1921 91,140 

Cost  of  Goods  Sold 303,000 


PROFIT  AND  LOSS ;  SURPLUS  119 

COMPANY  A  AND  SUBSIDIARIES  B  AND  C 

Consolidated  Profit  and  Loss  Statement  {Exhibit  B) 

For  the  Year  Ending  December  31, 1921 

Gross  Sales $475,000 

Less  Returned  Sales  and  Allowances 6,000 

Net  Sales. 469,000 

Less  Cost  of  Goods  Sold  (Exhibit  A) 303,000 

Gross  Profit  on  Sales 166,000 

Less  Selling  Expenses 60,000 

Net  Profit  on  Sales 106,000 

Less  General  and  Administrative  Expenses 36,000 

Net  Profit  on  Operations 70,000 

Deduct  Bond  Interest  Paid 6,500 

Net  Profit  for  the  Year $63,500 

Distributed  as  follows: 

Minority  interest  of  Company  B $  1,700 

Minority  interest  of  Company  C 3,700 

Holding  Company  A 58,100 

$63,500 


First  illustration  continued:  Consolidated  surplus  statement. 

— Following  is  a  summary  of  the  surplus  accounts  of  the  three 

companies: 

Co.  A  Co.  B  Co.  C 

Surplus,  January  1, 1921 $35,000  $25,000  $20,000 

Add  Profits  of  1921 34,000  17,000         18,500 

Surplus,  December  31, 1921 $69,000       $42,000      $38,500 

In  studying  the  consolidated  surplus  statement  working 
papers  which  follow,  it  should  be  remembered  that  Company 
A  has  taken  up  its  90  per  cent  of  the  profits  of  Company  B  of 
former  years,  these  profits  being  included  in  its  $35,000  surplus 
at  January  1,  1921. 

The  $31,850.00  balance  of  the  holding  company's  surplus, 
after  eliminating  the  $3,150.00  unrealized  profit  at  the  be- 
ginning of  the  year,  should  agree  with  the  surplus  shown  in 
the  consolidated  balance  sheet  of  January  1,  1921.  The  sub- 
sidiary surplus  accounts  are  dealt  with  in  accordance  with 
paragraph  2  c  on  page  112. 


120 


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PROFIT  AND  LOSS ;  SURPLUS  121 

COMPANY  A  AND  SUBSIDIARIES  B  AND  C 

Consolidated  Surplus  Statement  {Exhibit  C) 

For  the  Year  Ending  December  31, 1921 

Surplus,  January  1, 1921 $31,850 

Add  Holding  Company's  share  of  1921  Profits  (Exhibit  B) 58,100 

Surplus,  December  31, 1921  (Per  Consolidated  Balance  Sheet) $89,950 


Second  illustration:  Consolidated  profit  and  loss  and  surplus 
statements. — ^This  illustration  will  be  based  on  the  same  facts 
as  the  first  illustration.  In  addition  it  is  assumed  that  both 
subsidiaries  have  paid  dividends,  which  have  been  credited  by- 
Company  A  to  the  respective  investment  accounts.  The  hold- 
ing company  has  also  paid  dividends.  None  of  these  dividends 
will  appear  in  the  profit  and  loss  statements  of  the  several  com- 
panies, and  hence  the  consolidated  profit  and  loss  statement 
will  be  the  same  as  in  the  first  illustration. 

Following  is  a  statement  of  the  surplus  accounts : 

Co.  A        Co.  B        Co.  C 

Surplus,  January  1, 1921 $35,000      $25,000       $20,000 

Profits,  1921 34,000        17,000         18,500 

Total 69,000        42,000        38,500 

I^s  Dividends  Paid 6,000  4,500  3,000 

Surplus,  December  31, 1921 $63,000      $37,500      $35,500 


The  following  consolidated  surplus  statement  is  prepared 
from  the  working  papers  on  page  122. 

COMPANY  A  AND  SUBSIDIARIES  B  AND  C 

Consolidated  Surplus  Statement 

Year  Ending  December  31, 1921 

Surplus,  January  1,  1921 $31,850 

Add  Profits  of  1921— Per  Consolidated  P.  &  L.  Statement 58,100 

Total 89,950 

Less  Dividends  Paid 6,000 

Surplus,  December  31,  1921 $83,950 


122 


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PROFIT  AND  LOSS;  SURPLUS  123 

Third  illustration:  Consolidated  profit  and  loss  and  surplus 
statements. — ^This  illustration  is  based  on  the  same  facts  as  the 
first  illustration,  with  the  further  assumption  that  the  holding 
company  is  carrying  its  investment  accounts  at  cost,  and  is 
taking  up  subsidiary  dividends  as  a  credit  to  Profit  and  Loss. 
But  since  no  dividends  were  paid  during  1921,  there  will  be  no 
dividend  figures  in  the  profit  and  loss  statements,  and  hence 
the  consolidated  profit  and  loss  working  papers  will  be  the  same 
as  in  the  first  two  illustrations. 

The  consolidated  surplus  statement  working  papers  will 
diflfer  from  the  two  preceding  ones  in  this  particular:  the  holding 
company  has  not  taken  up  the  profits  of  the  subsidiaries  and 
hence  its  surplus  will  not  include  these  profits  but  will  include 
the  subsidiary  dividends.  Therefore  the  surplus  accounts  of 
the  subsidiaries  at  the  beginning  of  the  period  will  be  disposed 
of  as  follows: 

a.  Carry  minority  interest  in  present  surplus  to  the  minority 
column. 

b.  Eliminate  holding  company's  proportion  of  subsidiary 
surplus  at  date  of  acquisition. 

c.  Carry  to  the  consolidated  surplus  column  the  holding 
company's  proportion  of  the  increase  or  decrease  in  sub- 
sidiary surplus  since  acquisition. 

In  this  illustration  it  will  be  assumed  that  Company  B  had  a 
surplus  of  $20,000  at  the  date  of  acquisition.  Since  that  date 
its  profits  have  been  $15,000  and  its  dividends  have  been 
$10,000.  Company  A  has  not  taken  up  its  share  of  the  profits 
but  has  taken  up  its  share  of  the  dividends  of  prior  years  by 
credits  to  profit  and  loss. 

In  the  preceding  illustrations  Company  A's  surplus  was 
shown  as  $35,000  at  January  1,  and  this  balance  included 
$13,500  (90  per  cent  of  $15,000)  profits  of  Company  B  taken  up. 
In  this  illustration,  under  the  assumption  that  Company  A  has 
taken  up  only  $9,000  (90  per  cent  of  $10,000)  dividends.  Com- 
pany A's  surplus  will  be  $30,500  instead  of  $35,000.  The 
surplus  accounts  of  the  other  companies  will  be  unchanged. 

The  consolidated  surplus  statement  prepared  from  the  fol- 
lowing working  papers  will  be  exactly  Uke  the  one  in  the  first 
illustration,  on  page  121, 


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PROFIT  AND  LOSS;  SURPLUS  125 

Fourth  illustration:  Consolidated  profit  and  loss  statement. — 
This  illustration  will  be  based  on  the  same  facts  as  the  third 
illustration,  with  the  additional  assumption  that  the  three 
companies  paid  dividends  during  1921  as  follows: 

Company  A $6,000 

Company  B 4,500 

Company  C 3,000 

Company  A  has  taken  up  its  proportion  of  the  subsidiary 
dividends  by  credits  to  profit  and  loss;  it  is  carrying  the  invest- 
ment accounts  at  cost. 

The  consolidated  profit  and  loss  statement  working  papers 
will  be  the  same  as  in  the  first  illustration,  on  page  118,  down 
to  Net  Profit  on  Operations.  The  dividends  are  shown  under 
Miscellaneous  Income  in  the  working  papers  on  page  126. 


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Chapter  XV 

CONSOLIDATED   PROFIT  AND  LOSS   STATEMENT, 
SURPLUS  STATEMENT  AND  BALANCE  SHEET 

COMBINED  WORKING   PAPERS   FROM  TRIAL   BALANCES 

Form  of  working  papers. — ^When  a  single  set  of  working  pa- 
pers is  prepared  from  the  trial  balances  of  the  holding  company 
and  the  subsidiaries  to  obtain  the  consoHdated  figures  for  the 
cost  of  goods  sold  statement,  the  profit  and  loss  statement,  the 
surplus  statement,  and  the  balance  sheet,  the  working  papers 
should  contain  columns  for  the  trial  balance  of  each  company, 
for  adjustments,  inter-company  eliminations,  manufacturing 
account,  selling  account  (or  the  two  latter  may  be  combined 
in  a  single  Cost  of  Sales  column  to  save  space),  profit  and  loss, 
and  balance  sheet. 

Outline  of  illustrations. — ^This  chapter  will  contain  three 
illustrations,  divided  into  two  groups,  as  follows: 

Group  I.  Subsidiary  profits  and  losses  taken  up  on  the  hold- 
ing company's  books;  dividends  recorded  as  a  credit  to  the 
Investment  account. 

First  illustration:  All  dividends  credited  to  investment 
account;  hence  balance  at  end  of  year  represents  book 
value  at  the  beginning  of  year  minus  dividends  received 
during  the  year,  and  plus  goodwill. 

Group  II.    Investment  account  carried  at  cost. 

Second  illustration:  100  per  cent  ownership.  All  stock 
acquired  at  beginning  of  period. 

Third  illustration:  Less  than  100  per  cent  ownership. 
Stock  acquired  prior  to  beginning  of  period. 

First  illustration. — ^This  illustration  is  based  on  the  same 
conditions  as  the  second  illustration  in  the  preceding  chapter. 
Ninety  per  cent  of  the  stock  of  Company  B  was  acquired  prior 
to  the  beginning  of  the  period,  and  80  per  cent  of  the  stock  of 
Company  C  was  acquired  at  the  beginning  of  the  period.  All 
subsidiary  earnings  and  dividends  have  been  recorded  through 
the  investment  account;  therefore  at  the  beginning  of  the  period 
the  investment  accounts  represented  book  value  plus  goodwill. 

128 


COMBINED  WORKING  PAPERS  129 

During  the  year  the  holding  company  has  taken  up  dividends 
by  credits  to  the  investment  accounts  but  has  not  taken  up  the 
subsidiary  profits  for  the  year. 

Following  are  the  trial  balances  of  the  holding  company  and 
subsidiaries  at  December  31,  1921. 

COMPANY  A  AND  SUBSIDIARIES 

Trial  Balances — December  31,  1921 

Debits  Co.  A         Co.  B         Co.  C 

Cash $16,450        $7,500       $22,500 

Accounts  Receivable 30,000        35,000        50,000 

Inventories,  January  1, 1921: 

Raw  Materials 40,000  15,000         15,000 

Goods  in  Process 25,000  30,000 

Finished  Goods 30,000 

Co.  B  Current  Account 10,000 

Co.  C.  Current  Account 5,000 

Plant  and  Machinery 125,000  70,000 

Investment  in  Stock  of  Co.  B  (90%) 90,450 

Investment  in  Stock  of  Co.  C  (80%) 57,600 

Bonds  of  Co.  C 40,000 

Purchases,  Raw  Materials 145,000  95,000         76,000 

Direct  Labor 85,000  65,000 

Manufacturing  Expense 70,000  40,000 

Returned  Sales  and  Allowances 3,000  2,000           1,000 

Selling  Expenses 23,000  22,000         15,000 

General  and  Administrative  Expenses 22,000  11,000           3,000 

Bond  Interest  Paid 6,000  2,500 

Dividends  Paid 6,000  4,500          3,000 

$754,500     $402,000     $258,000 


Credits 

Capital  Stock $200,000 

Surplus,  January  1,  1921 35,000 

Bonds  Payable 100,000 

Reserve  for  Depreciation 11,500 

Accounts  Payable 55,000 

Notes  Payable 50,000 

Company  A  Current 

Company  B  Current 

Sales 300,000 

Rent  of  Equipment  to  Co.  B 3,000 

Bond  Interest  Received  from  Co.  C 


$75,000 

$50,000 

25,000 

20,000 

50,000 

3,000 

20,000 

10,000 

45,000 

10,000 

5,000 

225,000 

120,000 

2,000 

$402,000 

$258,000 

In  the  following  consolidated  working  papers  the  adjustments 
and  inter-company  eliminations  are  cross-referenced  by  letters 
to  facilitate  tracing  offsetting  items. 


130 


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134  CONSOLIDATED  STATEMENTS 

Explanation  of  working  papers. — ^These  working  papers 
were  prepared  in  the  following  manner:  The  trial  balance 
figures  were  entered,  leaving  room  for  eliminations  after  the 
investment  accounts  and  after  the  capital  stock  and  surplus 
accounts.  The  trial  balance  columns  were  then  added  to  detect 
any  possible  errors  in  copying  figures  from  the  trial  balances 
to  the  working  papers. 

t  The  inventories  at  December  31,  1921,  were  entered  by 
adjustment  (a)  by  a  debit  to  Inventories  on  the  debit  sheet  and 
a  credit  to  Cost  of  Sales  on  the  credit  sheet.  The  inventories 
were  listed  in  detail  on  the  credit  side  in  the  columns  of  the 
several  companies,  so  that  they  could  be  readily  included  in  the 
total  credits  to  the  nominal  accounts  of  each  company  in  de- 
termining its  profit.  The  debit  to  Inventories  was  carried  to 
the  consolidated  balance  sheet  column.  In  drawing  up  the 
consolidated  balance  sheet  the  detail  of  the  inventories  can  be 
obtained  from  the  credit  sheet. 

An  adjustment  was  made  for  inter-company  profits  in  inven- 
tories at  January  1,  1921,  by  adjustment  (b)  debiting  Com- 
pany A's  surplus  and  crediting  the  inventories,  thus  reducing 
the  charge  to  cost  of  sales  for  the  opening  inventories. 
\  The  dividends  paid  by  Company  B  and  Company  C  were 
transferred  to  the  respective  surplus  accounts  by  adjustments 
(c)  and  (d).  These  entries  are  made  because  the  holding  com- 
pany has  taken  up  these  dividends  by  credits  to  the  invest- 
ment accounts.  Since  it  is  following  this  method  of  accounting, 
eliminations  will  be  made  on  the  basis  of  present  book  values; 
i.e.,  surplus  at  January  1,  1921,  less  dividends  paid  in  1921. 
The  investment  accounts  represent  book  values  at  January  1, 
1921,  less  dividends  received;  therefore  the  surplus  elimination 
should  be  on  the  basis  of  January  1,  1921  surplus  less  dividends 
paid. 

A  reserve  for  inter-company  profits  in  inventories  at  Decem- 
ber 31,  1921,  was  created  by  adjustment  (e)  charging  cost  of 
sales  (as  a  reduction  of  the  inventories  to  be  credited  to  cost 
of  sales)  and  crediting  the  reserve,  which  was  carried  to  the 
consolidated  balance  sheet  column. 

All  inter-company  accounts  were  eliminated.  These  elim- 
inations may  be  traced  by  the  letters. 

All  items  affecting  cost  of  sales  were  carried  to  the  cost  of 
sales  column  after  making  deductions  as  indicated  by  the  ad- 
justments and  eliminations.     Items  affecting  profit  and  loss 


COMBINED  WORKING  PAPERS  135 

and  items  to  appear  in  the  consolidated  balance  sheet  were 
carried  to  their  respective  columns. 

Trial  balance  nominal  account  debits  were  added  and  de- 
ducted from  trial  balance  nominal  account  credits  (including 
inventories)  to  determine  the  profit  of  each  company  and  the 
minority  interests  in  profits. 

The  adjustment  and  ehmination  columns  were  footed  to  see 
that  they  balanced. 

On  the  debit  sheet  the  total  of  the  consolidated  cost  of  sales 
column  was  determined;  the  total  of  the  credits  to  cost  of  sales 
was  determined  and  carried  over  to  the  debit  sheet  where  it 
was  deducted  from  the  total  debits  to  obtain  the  net  cost  of 
sales  of  $303,000.  This  amount  was  carried  to  the  debit  profit 
and  loss  column. 

On  the  credit  sheet  the  total  of  the  profit  and  loss  column  was 
determined;  the  total  of  the  debits  to  profit  and  loss  was  de- 
termined and  carried  over  to  the  credit  sheet  where  it  was 
deducted  from  the  total  credits  to  ascertain  the  net  profit  for 
the  year.  The  two  minority  interests  were  deducted  and  car- 
ried to  the  consoHdated  balance  sheet  column,  and  the  remain- 
ing net  profit,  applicable  to  the  holding  company,  was  carried 
to  the  consolidated  balance  sheet  column. 

The  two  consolidated  balance  sheet  columns  were  footed. 

Consolidated  statements. — ^The  consolidated  cost  of  goods 
sold  statement  prepared  from  these  working  papers  will  be 
exactly  like  the  one  on  page  118  of  Chapter  XIV,  and  will 
show  $303,000  as  the  cost  of  goods  sold  during  the  year.  The 
consolidated  profit  and  loss  statement  will  be  identical  with  the 
one  on  page  119  of- Chapter  XIV,  and  will  show  $58,100  as 
the  consolidated  net  profit.  The  consolidated  surplus  state- 
ment will  be  a  duplicate  of  the  one  on  page  121  and  will  show 
$83,950  as  the  consolidated  surplus.  This  is  the  same  surplus 
which  appears  in  the  following  consolidated  balance  sheet. 

The  following  data  are  summarized  from  the  working 
papers  for  use  in  the  consoHdated  balance  sheet: 

Minority     Minority  ConsolidaUd 
in  B  inC        Surplus 

Surplus,  January  1,  1921— less  dividends $2,050  $3,400       $25,850 

Profits  of  1921 1,700  3,700        58.100 

Surplus,  December  31,  1921 3,750  7,100       $83,950 

Minority  Interests  in  Capital  Stock 7,500  10,000 

Total  Minority  Interests $11,250  $17,100 


136  CONSOLIDATED  STATEMENTS 

COMPANY  A  AND  SUBSIDIARIES 

Consolidated  Balance  Sheet 

December  31, 1921 

Assets 
Fixed  Assets: 

Plant  and  Machinery $195,000 

Less  Reserve  for  Depreciation 14,500     $180,500 

Goodwill 8,500    $189,000 

Current  Assets: 
Inventories: 

Raw  Materials $86,000 

Goods  in  Process 80,000 

Finished  Goods 95,000      261,000 

Less  Reserve  for  Inter-Company 
ProHt 9,150       251,850 

Accounts  Receivable 115,000 

Cash 46,450      413,300 

$602,300 

LiabUitus 
Fixed  Liabilities: 

Bonds  Payable $150,000 

Less  Treasury  Bonds 40,000     $110,000 

Current  Liabilities: 

Accounts  Payable 85,000 

Notes  Payable 95,000       180,000 

Minority  Interests: 

In  Company  B  (10%) 11,250 

In  Company  C  (20%) 17,100         28,350 

Capital: 

Capital  Stock 200,000 

Surplus 83,950       283,950 

$602,300 

Second  illustration. — In  this  illustration,  which  is  taken  from 
a  recent  Ohio  C.  P.  A.  examination,  the  holding  company 
acquired  all  of  the  stock  of  the  subsidiaries  at  the  beginning  of 
the  period.  No  profits  have  been  taken  up;  dividends  have  been 
credited  to  Dividends  Received  to  be  transferred  to  Surplus 
at  the  end  of  the  period.  A  consolidated  profit  and  loss  state- 
ment, surplus  statement  and  balance  sheet  are  to  be  prepared 
from  the  following  trial  balances  at  the  end  of  1919. 


COMBINED  WORKING  PAPERS  137 

Cleveland  Cincinnati  Columbus 

Debits                                   Mfg.  Co.  Mfg.  Co.  Mfg.  Co. 

Cash $150,000  $50,000  $110,000 

Accounts  Receivable 650,000  210,000  400,000 

Notes  Receivable 300,000  50,000  50,000 

Raw  Materials  Purchased 600,000  380,000  490,000 

Labor 430,000  350,000  350,000 

Manufacturing  Expenses 220,000  170,000  160,000 

Selling  Expenses 100,000  60,000  100,000 

Administrative  Expenses 50,000  30,000  40,000 

Plant  and  Machinery 1,000,000  600,000  800,000 

Dividends  Paid 450,000  100,000  200,000 

Capital  Stock  Owned: 

Cincinnati  Mfg.  Co 1,000,000 

Columbus  Mfg.  Co 1,500,000 

Inventory,  January  1, 1919 150,000  100,000  150,000 


$6,600,000  $2,100,000  $2,850,000 

Credits 

Accounts  Payable $150,000  $105,000  $360,000 

Notes  Payable 50,000  95,000  90,000 

Sales 1,500,000  1,100,000  1,200,000 

Dividends  Received 300,000 

Capital  Stock 4,500,000  500,000  800,000 

Surplus,  January  1, 1919 100,000  300,000  400,000 


$6,600,000    $2,100,000  $2,850,000 


The  inventories  at  December  31,  1919,  were  as  follows: 

Qeveland  Company $300,000 

Cincinnati  Company 150,000 

Columbus  Company 200,000 

Provide  10  per  cent  depreciation  on  total  plant  and  ma- 
chinery. 

Notes  payable  of  the  Cincinnati  Manufacturing  Co.  amount- 
ing to  $95,000  and  of  the  Columbus  Manufacturing  Co. 
amounting  to  $90,000  are  for  money  advanced  by  the  Cleveland 
Manufacturing  Co.  and  are  included  in  notes  receivable  of 
the  Cleveland  Manufacturing  Co. 

The  inventory  of  the  Columbus  Manufacturing  Co.  includes 
goods  purchased  from  the  Cleveland  Manufacturing  Co.  on 
which  the  latter  company  made  a  profit  of  $25,000. 

The  accounts  receivable  of  the  Cleveland  Manufacturing 
Co.  include  $200,000  due  from  the  Columbus  Manufacturing 
Co.  for  goods  shipped  during  the  year. 

The  entire  capital  stocks  of  the  Cincinnati  and  Columbus 
companies  were  acquired  on  January  1,  1919,  at  the  cost  as 
shown  by  the  books  of  the  Cleveland  Manufacturing  Co. 


138 


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142  CONSOLIDATED  STATEMENTS 

The  inter-company  sales  and  purchases  may  have  been  more 
than  $200,000  but  the  only  information  as  to  these  transactions 
is  contained  in  the  statement  that  there  were  $200,000  of  inter- 
company receivables  at  the  end  of  the  year  for  goods  sold  during 
the  year. 

THE  CLEVELAND  MANUFACTURING  COMPANY 

AND  SUBSIDIARIES  {Exhibit  A) 

CONSOUDATED   PrOFIT  AND  LoSS   STATEMENT 

For  the  Year  Ending  December  31, 1919 
Sales $3,600,000 

Less  Cost  of  Goods  Sold: 

Inventory,  January  1,  1919 $    400,000 

Purchases 1,270,000 

Labor 1,130,000 

Manufacturing  Expense 550,000 

Depreciation — Plant  and  Machinery 240,000 

Total $3,590,000 

Less  Inventory,  December  31,  1919 625,000       2,965,000 

Gross  Profit  on  Sales $635,000 

Less  Selling  Expenses 260,000 

Net  Profit  on  Sales $375,000 

Less  Administrative  Expenses \  120,000 

Net  Profit  for  the  Year $255,000 


THE  CLEVELAND  MANUFACTURING  COMPANY 

AND  SUBSIDIARIES  {Exhibit  B) 

Consolidated  Surplus  Statement 

For  the  Year  Ending  December  31, 1919 

Surplus— January  1,  1919 $100,000 

Add  Profits— 1919 255,000 

Total $355,000 

Deduct  Dividends  paid  in  1919 450,000 

Deficit— December  31,  1919 $95,000 


COMBINED  WORKING  PAPERS  143 

THE  CLEVELAND  MANUFACTURING  COMPANY 

AND  SUBSIDIARIES  {Exhibit  Q 

Consolidated  Balance  Sheet 

December  31, 1919 

Assets 
Fixed  Assets: 

Plant  and  Machinery $2,400,000 

Less  Reserve  for  Depreciation 240,000     $2,160,000 

Goodwill 500,000     $2,660,000 

Current  Assets: 

Inventories $650,000 

Less   Reserve   for  Inter-Company 
Profit 25,000        $625,000 

Accounts  Receivable 1,060,000 

Notes  Receivable 215,000 

Cash 310,000       2,210,000 

$4,870,000 

Liabilities 
Capital: 

Capital  Stock $4,500,000 

Less  Deficit  (Exhibit  B) 95,000     $4,405,000 

Current  Liabilities: 

Accounts  Payable 415,000 

Notes  Payable 50,000  465,000 

$4,870,000 


Third  illustration. — This  illustration  is  based  on  the  same 
data  as  the  second  illustration,  with  the  following  changes: 

1.  The  holding  company  owns  only  90  per  cent  of  the  stock 
of  each  company.  This  change  will  introduce  the  feature  of 
minority  interests. 

2.  The  holding  company  acquired  its  stock  interests  at 
January  1,  1918.    This  change  will  introduce  two  features: 

a.  Adjustments  will  have  to  be  made  for  inter-company 
profit  in  inventories  at  January  1,  1919,  which  were: 

(1).   In  Cincinnati  inventories,  $20,000  added  on  sales 

by   Columbus. 
(2).   In  Cleveland  inventories,  $15,000  added  on  sales  by 
Cincinnati.     (See  page  148). 


144 


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148  CONSOLIDATED  STATEMENTS 

b.  The  eliminations  from  the  investment  accounts  and  the 
subsidiary  surplus  accounts  will  be  based  on  book  values  at  a 
date  prior  to  the  beginning  of  the  period,  and  hence  on  surplus 
amounts  different  from  those  shown  in  the  trial  balances,  which 
are  the  surplus  balances  at  the  first  of  the  year. 

Since  the  holding  company  has  not  taken  up  profits,  losses 
and  dividends  by  entries  in  the  investment  accounts,  the 
balances  represent  the  cost  at  January  1,  1918.  At  that  date 
the  Cincinnati  Manufacturing  Company  had  a  surplus  of  $160,- 
000  and  the  Columbus  Manufacturing  Company  had  a  surplus 
of  $500,000. 

Since'^the  holding  company  did  not  own  all  of  the  stock  of  the 
subsidiaries  during  the  year,  the  dividends  received  were  only 
90  per  cent  of  the  amounts  paid  by  the  subsidiaries,  and  hence 
in  the  following  working  papers  the  dividends  received  from  the 
Cincinnati  Company  appear  in  the  trial  balance  at  $90,000 
instead  of  $100,000,  and  the  dividends  received  from  the 
Columbus  Company  appear  at  $180,000  instead  of  $200,000,  a 
total  reduction  of  $30,000.  The  holding  company's  cash  is 
correspondingly  reduced  from  $150,000  to  $120,000. 

THE  CLEVELAND  MANUFACTURING  COMPANY 

AND  SUBSIDIARIES  {Exhibit  A) 

Consolidated  Profit  and  Loss  Statement 

For  the  Year  Ending  December  31,  1919 

Sales $3,600,000 

Deduct  Cost  of  Goods  Sold: 

Inventory,  January  1,  1919 $  368,500 

Purchases 1,270,000 

Labor 1,130,000 

Manufacturing  Expense 550,000 

Depreciation  —  Plant  and  Machinery 240,000 

Total 3,558,500 

Less  Inventory,  December  31,  1919 627,500        2,931,000 

Gross  Profit  on  Sales 669,000 

Less  Selling  Expenses 260,000 

Net  Profit  on  Sales 409,000 

Less  Administrative  Expenses 120,000 

Net  Profit  for  the  Year $  289,000 

For  Minority  Stockholders  of  Cincinnati  Mfg.  Co. .     $   10,000 
For  Minority  Stockholders  of  Columbus  Mfg.  Co. .  3,000 

For  Cleveland  Mfg.  Co 276,000 

$289,000 


COMBINED  WORKING  PAPERS  149 

Before  preparing  the  consolidated  surplus  statement,  it  is 
necessary  to  assemble  the  various  elements  of  the  consolidated 
surplus  at  January  1,  1919. 

Cleveland  Mfg.  Co.  surplus  after  adjustment  for  inter-company  profit 

in  inventories  at  January  1,  1919 $68,500 

Add  holding  company's  90%  of  increase  in  Cincinnati  Mfg.  Co.'s 

surplus  since  acquisition 126,000 

Total 194,500 

Deduct  holding  company's  90%  of  decrease  in  Columbus  Mfg.  Co.'s 

surplus  since  acquisition 90,000 

Adjusted  surplus  as  at  January  1, 1919 $104,500 


THE  CLEVELAND  MANUFACTURING  COMPANY 

AND  SUBSIDIARIES  {Exhibit  B) 

Consolidated  Surplus  Statement 

For  the  Year  Ending  December  31, 1919 

Surplus,  January  1,  1919 $104,500 

Add  Profits  for  1919  (Exhibit  A) 276,000 

Total 380,500 

Deduct  Dividends  Paid 450,000 

Deficit,  December  31,  1919 $69,500 

Before  preparing  the  consolidated  balance  sheet  it  is  desirable 
to  assemble  the  elements  of  the  minority  interests: 

Cincinnati  Columbus 

Capital  stock $50,000  $80,000 

Surplus,  January  1,  1919 30,000  40,000 

Profits,  1919 10,000  3,000 

Total 90,000  123,000 

Less  Dividends  paid  in  1919 10,000  20,000 

Minority  Interests,  at  December  31,  1919 $80,000        $103,000 


150  CONSOLIDATED  STATEMENTS 

THE  CLEVELAND  MANUFACTURING  COMPANY 

AND  SUBSIDIARIES  {Exhibit  Q 

Consolidated  Balance  Sheet 

December  31, 1919 

Assets 
Fixed  Assets: 

Goodwill $736,000 

Plant  and  Machinery $2,400,000 

Less  Reserve  for  Depreciation 240,000       2,160,000     $2,896,000 

Current  Assets: 

Inventories 650,000 

Less  Reserve  for  Inter-Company  Profit        22,500  627,500 

Accounts  Receivable 1,060,000 

Notes  Receivable 215,000 

Cash 280,000       2,182,500 

$5,078,500 


Liabilities 
Current  Liabilities: 

Accounts  Payable $  415,000 

Notes  Payable 50,000      $  465,000 

Minority  Interests: 

Cincinnati  Mfg.  Co,  (10%) 80,000 

Columbus  Mfg.  Co.  (10%) 103,000  183,000 

Capital: 

Capital  Stock 4,500,000 

Less  Deficit  (Exhibit  B) "  69,500       4,430,500 

$5,078,500 


APPENDIX  A 

PROBLEMS 

Problem  i. — ^Three-fourths  of  the  capital  stock  of  Company 
A  and  two-thirds  of  the  capital  stock  of  Company  B  is  owned 
by  the  holding  company  C.  Company  C  purchased  the  above 
stock  of  Company  A  at  150  in  February,  1905,  on  the  basis  of 
the  balance  sheet  given  below,  dated  January  1,  1905. 

Assets  Liabilities 

Real  Estate,  Plant,  etc $100,000  Capital  Stock $150,000 

Inventory,  Merchandise 100,000  Surplus 75,000 

Accounts  Receivable 75,000  Bills  Payable 75,000 

Cash 25,000 


$300,000  $300,000 


During  the  year  1905  Company  A  made  a  net  profit  after 
providing  for  depreciation,  bad  debts,  etc.,  of  $5,000,  and  the 
directors  of  Company  A  declare  and  pay  a  dividend  of  10 
per  cent  as  of  February  15,  1906. 

The  stock  of  Company  B  owned  by  Company  C  was  pur- 
chased in  March,  1905,  at  125,  on  the  basis  of  the  balance  sheet 
below,  dated  January  1,  1905. 

Assets  Liabilities 

Real  Estate,  Plant,  etc $450,000  Capital  Stock $500,000 

Patents 50,000  Bonded  Indebtedness 200,000 

Inventory,  Merchandise ....  200,000  Accounts  Payable 62,500 

Accounts  Receivable 150,000  Surplus 125,000 

Cash 37,500 


$887,500  $887,500 


During  the  year  1905  Company  B  made  a  net  profit  of  $50,- 
000  after  making  all  necessary  provision  for  bad  debts  and  for 
depreciation  on  plant,  machinery  and  patents.  The  directors 
of  Company  B  declare  and  pay  a  dividend  of  8  per  cent  as  of 
February   14,   1906. 

Draw  up  all  the  necessary  entries  in  respect  to  the  purchase 
of  the  stock  of  the  two  companies,  their  earnings  and  dividends, 
as  they  should  appear  on  the  books  of  Company  C,  the  holding 
company. 

151 


152  CONSOLIDATED  STATEMENTS 

Problem  2. — On  January  1,  1910,  X  Y  Z  Company  acquired 
the  entire  capital  stock  of  the  P  Q  Company,  consisting  of  1,000 
shares  of  par  value  of  $100  each,  for  which  was  paid  the  sum  of 
$150,000.  After  the  transaction  was  recorded  on  the  books  of 
the  X  Y  Z  Company,  the  balance  sheets  of  the  two  companies 
were  as  follows: 

X  Y  Z  Company  P  Q  Company 

Real  Estate $  50,000  $25,000 

Buildings,  Plant  and  Equipment. . .     75,000  45,000 

Goodwill 25,000 

Investment  in  P  Q  Company 150,000 

Inventories 80,000  20,000 

Accounts  Receivable 70,000*  85,000 

Accounts  Payable $50,000  $50,000* 

Loans 50,000 

Capital  Stock 250,000  100,000 

Surplus 100,000  25,000 

$450,000     $450,000        $175,000     $175,000 


♦Includes  account  of  $is,ooo  due  by  P  Q  Company  to  X  Y  Z  Company. 

Prepare  a  consolidated  balance  sheet. 

Problem  3. — Company  A  purchased  on  January  1,  1917,  the 
entire  capital  stock  of  Company  B  at  $175  per  share,  and  the 
entire  stock  of  Company  C  at  $80  per  share.  There  are  no 
inter-company  accounts  or  inventories. 

You  are  handed  the  balance  sheets  as  understated,  at  June 
30,  1917,  and  are  requested  to  prepare  a  consolidated  balance 
sheet  of  the  A  Company  and  its  subsidiaries  at  that  date. 

BALANCE  SHEET-COMPANY  A 

Property  and  goodwill $850,000        Capital  stock $2,250,000 

Stock  of  subsidiary  companies    1,500,000        Current  liabilities 150,000 

Current  assets 700,000        Surplus,  January  1 525,000 

Undivided   profits   for   half 
year 125,000 


$3,050,000  $3,050,000 


BALANCE  SHEET— COMPANY  B 

Property  and  goodwill $650,000        Capital  stock $400,000 

Current  assets 60,000        Current  liabilities 10,000 

Surplus,  January  1 200,000 

Undivided   profits   for   half 

year 100,000 

$710,000  $710,000 


APPENDIX  A 


153 


BALANCE  SHEET-COMPANY  C 


Property  (as  appraised  Janu- 
ary 1,  1917) $1,130,000 

Current  assets 180,000 


$1,310,000 


Capital  stock $1,000,000 

Current  liabilities 240,000 

Surplus,  January  1 30,000 

Undivided   profits   for  half 
year 40,000 

$1,310,000 


Problem  4. — In  the  process  of  consolidating  several  compet- 
ing establishments,  Corporation  A,  the  holding  company, 
acquires  $98,000  out  of  a  total  of  $100,000  of  the  capital  stock 
of  Company  B.  At  the  time  of  the  purchase  the  balance  sheet 
of  Company  B  showed  surplus  and  undivided  profits  of  $50,000. 
Company  A  bought  the  stock  of  B  at  200  per  cent.  Almost 
immediately  after  the  purchase  Company  B  declared  and  paid 
a  cash  dividend  of  25  per  cent. 

In  what  ways  would  the  payment  of  this  dividend  affect  (a) 
the  balance  sheet  of  B;  (b)  the  balance  sheet  of  A;  (c)  the 
consoHdated  balance  sheet  of  A  and  its  subsidiary  companies.? 

Give  reasons  for  your  answer. 

Problem  5. — Prepare  a  consolidated  balance  sheet  with  the 
use  of  the  data  contained  below: 


COMPANY  A  (Holding  Company) 

Balance  Sheet 

December  31, 1913 


Assets 
Investment    in    other    com- 
panies at  cost: 
B  (75%  interest)  $1,000,000 
C  (70%  interest)      750,000 
D  (80%  interest)      850,000  $2,600,000 


Other  Sundry  Assets 1,400,000 


$4,000,000 


Liabiliitfs 

Capital  Stock $2,000,000 

Collateral  Trust  5%  Notes..     1,000,000 
Surplus 1,000,000 


$4,000,000 


Note:  As  indicated  above,  the  Holding  Company  has  not 
recognized  in  its  books  the  increase  or  decrease  in  the  value 
(represented  in  profits  and  losses)  of  the  investments  in  sub- 


154 


CONSOLIDATED  STATEMENTS 


sidiaries,  except  that  dividends  received  from  time  to  time  have 
been  carried  to  surplus  account. 

The  dates  as  of  which  the  interests  in  the  various  companies 
were  acquired  are  as  follows: 

B— January  1,  1910 
C— July  1,  1908 
D— June      30,  1912 


Asstts 

Fixed  Assets 

Current  Assets , 

Deferred  Charges 


COMPANY  B 

Balance  Sheet 

December  31, 1913 

Liabilities 

$500,000        Capital  Stock $600,000 

500,000        Current  Liabilities 100,000 

100,000        Surplus: 

Balance  1/1/10    $100,000 
Profits  Since....    500,000 

600,000 
Dividends 200,000      400,000 

$1,100,000  $1,100,000 


COMPANY  C 

Balance  Sheet 

December  31, 1913 

Assets  Liabilities 

Fixed  Assets $700,000  Capital  Stock $800,000 

Cnirrent  Assets 250,000  Current  Liabilities 300,000 

Deferred  Charges 50,000 

Deficiency  Account: 

Balance  1/1/1906.  $250,000 
Dividends,  Dec.  1, 

1913 500,000 

750,000 
♦Profits  from  1/1/ 

1906 650,000       100,000 

$1,100,000  $1,100,000 

*  It  can  be  aasumed  that  there  was  no  fluctuation  of  profits  as  between  months. 


APPENDIX  A  155 

COMPANY  D 

Balance  Sheet 

December  31, 1913 

Assets  Liabilities 

Fixed  Assets 1500,000        Capital  Stock $800,000 

Current  Assets 500,000        Current  Liabilities 100,000 

Deferred  Charges 100,000        Surplus: 

Balance  1/1/1911   $300,000 
♦Profits  Since 800,000 


1,100,000 
Dividends    declared 
in  1911 900,000       200,000 


$1,100,000  $1,100,000 


*  The  amount  of  $800,000  is  made  up  thus: 

Profits    1911 $600,000 

>Loss       1912 100,000 

Profits    1913 300,000 

1  For  tlie  purpose  of  solving  the  problem  assume  that  $50,000  of  this  loss  was  incurred  in  the  ax  months 
•ndins  June  30,  igi3. 

Prepare:  (A)  Consolidated  working  papers. 
(B)  Consolidated  balance  sheet. 

Problem  6. — ^The  following  is  a  balance  sheet  of  the  Brown 
Company  as  at  December  31,  1917: 

Real  Estate,  Buildings  and  Machinery $200,000 

Patents  and  Goodwill 350,000 

Investment  in  Black  Company — 1,800  Shares  of  $100 

each,  purchased  March  31,  1917,  for 270,000 

Inventory $410,000 

Bills  and  Accounts  Receivable 320,000 

Cash 70,000 

Advances  to  Black  Company 130,000  930,000 


Total $1,750,000 

Capital  Stock $500,000 

Bills  Payable 405,000 

Accounts  Payable 375,000          780,000 

Surplus — ^January  1,  1917 275,000 

Profits  for  Year 320,000 

595,000 

Less  Dividends  Paid 125,000          470,000 

Total $1,750,000 


156  CONSOLIDATED  STATEMENTS 

The  Balance  Sheet  of  the  Black  Company  as  at  December 
31,  1917,  shows  the  following  condition: 

Machinery  and  Equipment $460,000 

Inventory $130,000 

Accounts  and  Bills  Receivable 80,000 

Cash 2,000          212,000 

Total $672,000 

Capital  Stock  2,000  Shares $200,000 

Bills  Payable $205/)00 

Advances  from  Brown  Company 130,000 

Accounts  Payable 62,000         397,000 

Surplus — ^January  1,  1917 15,000 

Profits  (earned  proportionately  throughout  the  year) . . .  60,000            75,000 

Total $672,000 


Prepare  a  consolidated  balance  sheet  as  at  December  31, 
1917. 

What  position  would  you  take  should  the  client  request  a 
certified  balance  sheet  of  the  Brown  Company  by  itself  as  at 
December  31, 1917  ?  Submit  your  answer  in  the  form  of  a  letter 
addressed  to  the  client,  giving  reasons  for  your  conclusions. 

Problem  7. — On  January  1, 1913,  the  A  B  Company  acquired 
90  per  cent  of  the  stock  of  the  X  Y  Company  and  80  per  cent  of 
the  stock  of  the  P  Q  Company,  two  subsidiary  companies  which 
it  thus  controlled  and  whose  policy  and  general  administration 
it  directed,  the  minority  holdings  in  each  case  being  in  the  hands 
of  the  officers  and  employees  of  the  subsidiary  companies  or  of 
other  interests  friendly  to  the  A  B  Company.  On  June  30, 1913, 
the  holdings  in  the  X  Y  Company  were  reduced  to  80  per  cent 
by  the  sale  of  100  shares  at  $200  per  share  to  certain  employees 
not  heretofore  stockholders;  while  in  the  case  of  the  P  Q  Com- 
pany, owing  to  the  resignation  of  an  officer,  his  holdings,  con- 
sisting of  100  shares,  were  purchased  at  par,  the  holdings  by 
the  A  B  Company  being  thus  increased  to  90  per  cent,  so  that 
on  December  31,  1913,  the  proportion  of  holdings  in  the  two 
companies  was  just  reversed. 

The  following  are  the  trial  balances  of  all  three  companies 
(after  closing)  at  December  31,  1913: 


APPENDIX  A 


157 


Trial  Balances  at  December  31,  1913 

Particulars  A  B  Company  X  Y  Company  P  Q  Company 

Properties $85,000  $75,000 

Goodwill $100,000 

Stockholdings: 
In  X  Y  Co.,  800  shares. 

(book  value)  115,000* 

In  P  Q  Co.,  900  shares 

(at  cost)  82,000 

Current  Assets 132,000  135,000  90,000 

Capital  Stock: 
A  B  Co.,  3,000  shares.  $300,000 

X  Y  Co.,  1,000  shares.  $100,000 

P  Q  Co.,  1,000  shares.  $100,000 

Accounts  Payable 125,000  30,000  10,000 

Surplus  at  January  1 50,000  60,000  10,000 

1913  Profits 44,000**  45,000  35,000 

Dividends  paid  in  Decem- 
ber, 1913 30,000  40,000  25,000 

Current  Accounts 60,000  25,000  35,000 

$519,000  $519,000     $260,000  $260,000     $190,000  $190,000 


*  After  crediting  tbe  proceeds  of  the  too  shares  sold,  prior  to  which  the  investment  had  been  valued  at 
cost. 

**  Dividends  received  from  subsidiary  companies,  less  expenses  of  parent  company. 


Prepare  a  consolidated  balance  sheet.  Assume  that  the 
profits  earned  by  the  X  Y  Company  and  the  P  Q  Company, 
respectively,  to  June  30,  1913,  were  exactly  50  per  cent  of  the 
profits  for  the  complete  year. 

Problem  8. — From  the  following  trial  balances,  after  closing, 
prepare  a  consolidated  balance  sheet  as  at  January  31,  1915. 
This  consolidated  balance  sheet  must  be  prepared  in  form 
suitable  for  submission  to  a  firm  of  commercial  paper  brokers 
and  to  bankers. 

It  is  assumed  that  you  audited  all  these  balance  sheets  and 
had  every  opportunity  of  inquiring  and  satisfying  yourself 
relative  to  their  accuracy.  This  being  so,  append  to  the 
balance  sheet  such  a  certificate  as  you  would  feel  warranted 
in  signing. 


158  CONSOLIDATED  STATEMENTS 

ABC  MANUFACTURING  COMPANY 

Trial  Balance — after  closing — as  at  January  31, 1915 

Dr.  Cr. 

Real  Estate,  Buildings,  Machinery,  etc $1,000,000 

Goodwill 1,000,000 

Investment  in  and  advances  to  Paris  Manufacturing  Company: 

Capital  Stock— at  cost $250,000 

Advances 150,000  400,000 

Accounts  Receivable,  less  Reserve  $10,000.  150,000 
Inventories  of  Raw  Material,  Work  in  Pro- 
cess, Finished  Material,  etc 300,000 

Cash 50,000 

Notes  Payable $250,000 

Accounts  Payable 50,000 

Investment  in  and  advances  to  Brown-Smith  Company: 

Capital  Stock— par  value 100,000 

Advances 100,000         200,000 

First  Mortgage  6%  Gold  Bonds 500,000 

Preferred  Stock— 7%  Cumulative— 10,000 

shares 1,000,000 

Common  Stock— 10,000  shares 1,000,000 

Surplus 300,000 

$3,100,000     $3,100,000 


PARIS  MANUFACTURING  COMPANY 

Trial  Balance— after  closing — as  at  January  31, 1915 

Dr.  Cr. 

Real  Estate,  Buildings,  Machinery,  etc $250,000 

Goodwill 200,000 

Accounts  Receivable 60,000 

Inventories  of  Raw  Material,  Work  in    Process,    Fin- 
ished Material,  etc 175,000 

Cash 25,000 

Reserve  for  Bad  Debts $10,000 

Notes  Payable 90,000 

Accounts  Payable 10,000 

ABC  Manufacturing  Company 150,000 

Capital  Stock— 1,500  Shares 150,000 

Surplus 300,000 


$710,000        $710,000 


APPENDIX  A  ISO 

BROWN-SMITH  COMPANY 

Trial  Balance — after  closing — as  at  January  31, 1915 

Dr.  Cr. 

Real  Estate,  Buildings,  Machinery,  etc $50,000   . 

Accounts  Receivable 25,000 

Finished  Goods  on  Consignment — at  Selling  Price 100,000 

Inventories  of  Raw  Material,  Work  in  Process,  Fin- 
ished Materials,  etc 125,000 

Cash 25,000 

Notes  Payable $150,000 

Accounts  Payable 25,000 

ABC  Manufacturing  Company 100,000 

Capital  Stock— 1,000  shares 100,000 

Deficit 50,000 

$375,000        $375,000 


In  preparing  the  balance  sheet  required,  bear  the  following 
facts  in  mind: 

1.  The  dividends  on  the  preferred  stock  of  the  ABC  Man- 
ufacturing Company  were  paid  to  March  31,  1914. 

2.  The  finished  goods  on  consignment  (Brown-Smith 
Balance  Sheet)  cost  to  manufacture  $60,000.  On  realization 
it  is  estimated  a  profit  of  $10,000  will  be  made.  Disregard  any 
freight  expense. 

3.  All  inventories  are  priced  on  proper  basis. 

4.  All  accounts  receivable  are  considered  collectible  after 
allowing  for  reserves. 

Problem  9. — From  the  following  three  trial  balances  prepare 
a  consolidated  balance  sheet  as  at  December  31,  1912,  in  the 
form  you  would  draw  it  up  for  presentation  to  the  stockholders 
of  the  parent  company  (The  Safety  Razor  Company)  showing 
as  separate  items  therein  {a)  the  total  goodwill  of  the  com- 
bined companies;  and  {b)  the  net  profits  accruing  to  the  Safety 
Razor  Company. 


160  CONSOLIDATED  STATEMENTS 

SAFETY  RAZOR  COMPANY 

Trial  Balance 

December  31,  1912 

Preferred  Stock $1,500,000 

Common  Stock 1,500,000 

Investments  in  Subsidiary  Companies: 

4,000  shares  of  stock  of  L  W  Co.,  and 

4,000  shares  of  stock  of  Steel   Blade   Co.,   both   of 

$100  each— at  cost $2,500,000 

Accounts  Payable 20,000 

Dividends  from  Subsidiary  Companies 100,000 

Administration  Expenses 25,000 

L  W  Co.,  Current  Account 100,000 

Steel  Blade  Company  Advances 150,000 

Cash 270,000 

Organization  Expenses 75,000 

$3,120,000     $3,120,000 


L  W  COMPANY 

Trial  Balance 

December  31, 1912 

Properties  and  Plant $325,000 

Goodwill 250,000 

Investment  in  Steel  Blade  Co.: 

2,000  shares  of  a  par  value  of  $100  each  cost  $300,000      400,000 

Inventories 250,000 

Receivables 195,000 

Cash 90,000 

Capital  Stock— 4,000  shares $400,000 

Accounts  Payable 125,000 

Steel  Blade  Company 175,000 

Surplus  (Includes  $100,000  added  to  book  value  of  In- 
vestment in  Steel  Blade  Co.) 710,000 

Safety  Razor  Company 100,000 

$1,510,000     $1,510,000 


APPENDIX  A  161 

STEEL  BLADE  COMPANY 

Trial  Balance 

December  31, 1912 

Goodwill $50,000 

Property  and  Plant 325,000 

Inventories 190,000 

Receivables — General 105,000 

L  W  Company 195,000 

Cash 10,000 

Capital  Stock  (6,000  shares) $600,000 

Accounts  Payable 90,000 

Safety  Razor  Company 150,000 

Surplus 35,000 

$875,000        $875,000 


In  the  preparation  of  your  consolidated  balance  sheet,  be 
guided  by  the  following  assumed  facts : 

1.  That  the  Safety  Razor  Company  was  formed  on  March 
28,  1912,  and  acquired  its  stock  ownership  in  the  two  sub- 
sidiary companies,  as  shown  in  its  trial  balance  on  April  1,  1912. 

2.  That  at  January  1,  1912,  the  L  W  Company  had  a  surplus 
of  $605,000  and  the  Steel  Blade  Company  a  deficit  of  $50,000. 

3.  That  no  inventory  was  taken  of  either  the  L  W  Company 
or  the  Steel  Blade  between  January  1  and  December  31,  1912, 
the  business  of  the  companies  being  continued  without  interrup- 
tion notwithstanding  the  change  in  ownership  of  the  capital 
stocks  as  indicated  above.  It  is  estimated  on  reliable  authority, 
which  may  be  accepted  as  final,  that  from  January  1  to  March 
31,  1912,  the  net  profits  of  the  L  W  Company  amounted  to 
$30,000,  while  during  the  same  period  the  Steel  Blade  Company 
lost  $15,000. 

4.  That  prior  to  December  31,  1912,  the  L  W  Company 
declared  a  dividend  of  $100,000  payable  to  the  parent  company 
which  was  duly  taken  up  on  the  books  of  both  companies, 
being  passed  through  the  current  accounts  and  charged  against 
the  surplus  of  the  L  W  Company  prior  to  December  31,  1912. 

5.  That  the  difference  in  the  current  accounts  between  the 
Steel  Blade  Company  and  the  L  W  Company  represents,  as  to 
$10,000  merchandise  in  transit  and  as  to  the  remaining  $10,000, 
a  charge  for  rental  of  warehouse  for  the  last  six  months  of  1912, 
which  has  been  credited  to  the  rent  account  on  the  books  of 
the  Steel  Blade  Company. 


162  CONSOLIDATED  STATEMENTS 

Problem  lo. — ^The  Jones  Investment  Company  on  June  30, 
1915,  obtained  a  controlling  interest  in  three  operating  com- 
panies, viz.,  A  Company,  B  Company  and  C  Company. 

The  balance  sheets  of  the  four  companies  as  at  June  30, 1916, 
are  as  follows: 

Jones  Invest' 
Debits  tnentCo.       A  Co.  B  Co.       C  Co. 

Investments  in  other  companies: 

A  Co.— 60%  interest  (Cost  $900,000)  $1,000,000 

B  Co.— 75%  interest  at  cost 600,000 

C  Co.— 80%  interest  at  cost 400,000 

Advances  to  A  Co 100,000 

Advances  to  C  Co 50,000 

Cash 50,000     $100,000        $10,000     $50,000 

Accounts  Receivable 100,000  50,000     100,000 

Inventories 200,000         100,000       50,000 

Plant 1,000,000         600,000     400,000 

DeHcit 40,000 

$2,200,000  $1,400,000      $800,000  $600,000 

Credits 

Capital  Stock $2,000,000  $1,000,000  $800,000  $400,000 

Jones  Investment  Co 100,000  50,000 

Surplus 200,000       300,000  150,000 

$2,200,000  $1,400,000      $800,000  $600,000 

The  Surplus  and  Deficit  accounts  as 
shown  above  may  be  analyzed  as 
follows : 
Balance  to  June  30, 1915 $100,000     $200,000      $4,000      $100,000 

Surplus  income: 

6  months  to  Dec.  31,  1915 180,000      46,000  25,000 

6  months  to  June  30,  1916 217,500       220,000       40,000*         25,000 

Increase  in  value  of  A  Co.  stock 100,000 

Dividends  paid  Jan.,  1916 217,500*     300,000*     50,000* 

Balance  June  30, 1916 $200,000     $300,000     $40,000*     $150,000 

*  Indicates  debit. 

Prepare  a  consolidated  balance  sheet  of  the  four  companies 
as  at  June  30,  1916. 

A  statement  of  the  consolidated  earnings  and  surplus  account 
for  the  year  to  June  30,  1916,  is  not  required,  but  may  be  sub- 
mitted if  desired. 

In  preparing  the  balance  sheet  the  following  additional  facts 
should  be  considered: 

1.  The  holding  company  has  no  other  source  of  income  than 


APPENDIX  A  163 

the  dividends  from  the  subsidiaries,  which  have  been  taken  on 
to  its  books  when  received. 

2.  In  accordance  with  a  resolution  of  the  Board  of  Directors 
of  the  Jones  Investment  Company,  the  following  entry  was 
made  on  the  holding  company  books  at  June  30,  1916. 

Dr.  Investment  in  A  Co $100,000 

Cr.  Surplus 100,000 

3.  The  inventories  of  the  A  Company  include  $100,000  of 
stock  purchased  from  B  Company  in  1916.  The  cost  of  these 
goods  to  the  B  Company  was  $90,000. 

4.  Part  of  the  plant  of  the  C  Company  was  built  by  the  A 
Company  in  September  and  October,  1915,  at  a  cost  of  $80,000. 
For  this  work  the  A  Company  charged  the  C  Company  $95,000. 

5.  In  February,  1916,  part  of  the  equipment  of  the  B  Com- 
pany, which  was  carried  on  the  books  at  the  cost  price  of 
$50,000,  was  destroyed  by  fire.  The  only  entry  that  has  been 
made  in  respect  to  this  loss  was  to  credit  the  plant  account 
with  the  salvage  of  $5,000. 

Problem  ii. — Following  are  the  trial  balances  of  Company 
A  and  its  subsidiaries  at  December  31,  1920: 

Debits  Co.  A  Co.  B  Co.  C 

Cash S  75,000  $       50,000  $      60,000 

Accounts  Receivable 350,000  190,000  420,000 

Notes  Receivable 200,000  60,000  40,000 

Inventory,  Raw  Material,  Jan.  1,  1920.  .  .  150,000  105,000  160,000 

Purchases,  Raw  Materials 650,000  400,000  510,000 

Labor 450,000  320,000  370,000 

Manufacturing  Expenses 190,000  190,000  205,000 

Selling  Expenses 85,000  40,000  75,000 

Administrative  Expenses 45,000  25,000  35,000 

Inventory,  Goods  in  Process,  Jan.  1,  1920.  80,000  70,000  75,000 

Inventory,  Finished  Goods,  Jan.  1,  1920. .  90,000  65,000  80,000 

Plant  and  Equipment 900,000  400,000  750,000 

Investment  in  Stock  of  Company  B 875,000 

Investment  in  Stock  of  Company  C 1,200,000      

$5.340.000  $1.915,000  $2.780.000 

CrediU 

Capital  Stock $3,000,000  $500,000  $800,000 

Notes  Payable 110,000  80,000  60,000 

Accounts  Payable 100,000  65,000  250,000 

Bonds  Payable 500,000 

Premium  on  Bonds 5,000 

Reserve  for  Depreciation 100,000  60,000  112,500 

Sales 1,400,000  1,050,000  1,250,000 

Surplus 125,000  160,000  307,500 

$5,340,000  $1,915,000  $2,780,000 


164  CONSOLIDATED  STATEMENTS 

The  inventories  at  December  31,  1920,  were: 

Co.  A  Co.  B  Co.  C 

Raw  Material $280,000  $175,000  $210,000 

Goods  in  Process 95,000  80,000  85,000 

Finished  Goods 135,000  145,000  105,000 

Company  A  purchased  the  entire  stock  issues  of  Companies 
B  and  C  at  January  1,  1920,  at  the  prices  shown  in  the  trial 
balance.  During  the  year  each  of  the  three  companies  declared 
and  paid  a  five  per  cent  dividend.  Company  A  took  up  its 
dividends  from  Companies  B  and  C  by  credits  to  surplus. 
The  various  entries  for  the  dividends  were  the  only  entries 
affecting  the  surplus  accounts  during  the  year. 

At  December  31,  1919,  Company  A's  inventory  of  raw  mate- 
rial included  goods  purchased  from  Company  B  at  a  price  of 
$60,000,  the  cost  thereof  to  Company  B  being  $40,000. 

At  the  same  date  Company  B's  inventory  of  raw  material 
included  goods  purchased  from  Company  C  for  $75,000,  on 
which  Company  C  made  a  profit  of  $25,000. 

During  1920,  Company  C  sold  goods  to  Company  B  at  a 
price  of  $200,000.  These  goods  cost  Company  C  $160,000. 
Company  B  still  owes  $30,000  on  these  purchases,  the  indebt- 
edness being  included  in  the  accounts  payable. 

During  1920,  Company  B  sold  goods  to  Company  A  at  a  cost 
of  $300,000,  and  at  a  selling  price  of  $375,000.  Company  A 
made  cash  advances  totahng  $400,000  to  Company  B  during 
the  year.  The  sales  just  mentioned  were  charged  against  the 
advances  account,  the  $25,000  balance  of  which  is  included  in 
Company  B's  accounts  payable. 

The  inventories  at  December  31,  1920,  include  inter-company 
profits  as  follows: 

Raw  Goods  Finished 

Material  in  Process  Goods 

Company  A $20,000  $5,000  $4,000 

Company  B 30,000  6,000  5,000 

Company  A's  bonds  were  issued  July  1,  1920.  They  bear 
5  per  cent  interest,  payable  semi-annually,  and  mature  in  five 
years.    No  interest  has  been  paid. 

Allow  depreciation  at  five  per  cent  per  annum  on  the  cost  of 
the  fixed  assets: 

Prepare  the  following  consolidated  statements:  cost  of  goods 
manufactured  and  sold;  profit  and  loss;  surplus;  balance 
sheet. 


APPENDIX  B 

SOLUTIONS  TO  REVIEW  EXERCISES  FOLLOWING  CHAPTER  IX 

(*  Indicates  deduction) 
C&S6  A 

Assets  Co.  A         Co.B         Elim.       C.  B.  S. 

Investment  in  Stock  of  Co.  B  (90%). .  .$110,000 
Eliminate  present  book  value: 
Capital  stock:  90%  of  $100,000. .  $90,000 

Surplus:  90%  of     20,000..  18,000 

Goodwill $2,000G 

Sundry  Net  Assets 105,000     $120,000     225,000 

$215,000     $120,000     $108,000     $227,000 

Liabilitifs 
Capital  Stock: 

Co.  A $200,000  $200,000 

Co.B $100,000 

Eliminate  holding  company's  90%  $90,000 

Minority  interest  10%  10,000M 

Surplus: 

Co.  A 15,000  15,000S 

Co.B 20,000 

Eliminate  holding  company's  90%  18,000 

Minority  interest  10% 2,000M 

$215,000    $120.000    $108,000    $227,000 

Goodwill  $2,000;  minority  interest  $12,000;  surplus  $15,000. 

CaseB 

Assets  Co.  A         Co.  B         Elim.        C.  B.  S. 

Investment  in  Stock  of  Co.  B  (90%) . .  .$119,000 
Eliminate  present  book  value: 

Capital  stock:  90%  of  $100,000. .  $90,000 

Surplus:  90%  of     30,000..  27,000 

Goodwill $2,000G 

Sundry  Net  Assets 105,000     $130,000     235,000 

$224,000     $130.000     $117.0(X)     $237,000 

Liabilities 
Capital  Stock: 

Co.  A $200,000  $200,000 

Co.B $100,000 

Eliminate  holding  company's  90%  $90,000 

Minority  interest  10%  10,000M 

Surplus: 

Co.  A 24,000  24,000S 

Co.B 30,000 

Eliminate  holding  company's  90%  27,000 

Minority  interest  10%  3,000M 

$224,000     $130.000     $117,000     $237,000 

Goodwill  $2,000;  minority  interest  $13,000;  surplus  $24,000. 

165 


166  CONSOLIDATED  STATEMENTS 

CaseC 

Assets  Co.  A         Co.  B         Elim.        C.  B. 

Investment  in  Stock  of  Co.  B  (90%) . . ,  $105,500 
Eliminate  present  book  value: 
Capital  stock:  90%  of  $100,000. .  $90,000 

Surplus:  90%  of     15,000..  13,500 

Goodwill $2,000G 

Sundry  Net  Assets 105,000     $115,000  220,000 

$210,500     $115,000     $103,500     $222,000 

Liahilities 
Capital  Stock: 

Co.  A $200,000  $200,000 

Co.  B $100,000 

Eliminate  holding  company's  90%  $90,000 

Minority  interest  10%  10,000M 

Surplus : 

Co.  A 10,500  10,500S 

Co.B.. 15,000 

Eliminate  holding  company's  90%  13,500 

Minority  interest  10%  1,500M 

$210,500     $115,000     $103,500     $222,000 
Goodwill  $2,000;  minority  mterest  $11,500;  surplus  $10,500. 

CaseD 

Assets  Co.  A         Co.  B         Elim.        C.  B.  S. 

Investment  in  Stock  of  Co.  B  (90%) . . .    $83,000 
Eliminate  present  book  value: 
Capital  stock:  90%  of  $100,000. .  $90,000 

Deficit:            90%  of     10,000*.  9,000* 

Goodwill $2,000G 

Deficit: 

Co.  A 12,000  12,000S 

Co.B.. $10,000 

Eliminate  holding  company's  90%  9,000 

Minority  interest                    10%  1,000M 

Sundry  Net  Assets 105,000        90,000  195,000 

$200,000     $100,000       $90,000     $210,000 

Liabilities 
Capital  Stock: 

Co.  A $200,000  $200,000 

Co.  B $100,003 

Eliminate  holding  company's  90%  $90,000 

Minority  interest  10%  lO.OOOM 

$200,000     $100,000      $90,000     $210,000 
Goodwill  $2,000;  minority  interest  $9,000;  deficit  $12,000. 


APPENDIX  B  167 

Case  AA 

AssHs  Co.  A         Co.B  Elim.        C.B.S. 

Investment  in  Stock  of  Co.  B(90%)  Cost  $110,000 
Eliminate  book  value  at  acquisition: 
Capital  stock:  90%  of  $100,000. .  $90,000 

Surplus:  90%  of     20,000..  18,000 

Goodwill $2,000G 

Sundry  Net  Assets 105.000     $120,000 225,000 

$215,000     $120.000     $108.000     $227,000 

Liabilities 
Capital  Stock: 

Co.  A $200,000  $200,000 

Co.  B $100,000 

Eliminate  holding  company's  90%  $90,000 

Minority  interest  10%  10,OOOM 

Surplus: 

Co.  A 15,000  15,000S 

Co.B 20,000 

Minority:      10%  of  $20,000  pres- 
ent surplus 2,000M 

Elim.H.C.:90%of  20,000  sur- 
plus at  acquis 18,000 

$215.000     $120.000"     $108.000     $227,000 

Goodwill  $2,000;  mmority  interest  $12,000;  surplus  $15,000. 

CaseBB 

AsseU  Co.  A         Co.B  Elim.        C.B.S. 

Investment  in  Stock  of  Co.  B  (90%)  Cost  $110,000 
Eliminate  book  value  at  acquisition: 
Capital  stock:  90%  of  $100,000. .  $90,000 

Surplus:  90%  of     20,000..  18,000 

Goodwill $2,000G 

Sundry  Net  Assets 105.000     $130,000    235,000 

$215,000     $130.000     $108.000     $237,000 

Liabilitifs 
Capital  Stock: 

Co.  A $200,000  $200,000 

Co.B $100,000 

Eliminate  holding  company's  90%  $90,000 

Minority  interest  10%  10,000M 

Surplus: 

Co.  A 15,000  15,000S 

Co.B 30,000 

Minority:      10%  of  $30,000  pres- 
ent surplus  3,000M 
Elim.  H.  C:  90%  of  20,000  sur- 
plus at  acquis.         18,000 

Surplus:        90%  of  10,000  in- 
crease     9.000S 

$215.000     $130,000     $108,000     $237.000 

Goodwill  $2,000;  minority  interest  $13,000;  surplus  $24,000. 


168  CONSOLIDATED  STATEMENTS 

Caso  CC 

AsseU  Co.  A         Co.B  Elim.         C.B.S. 

Investment  in  Stock  of  Co.  B  (90%)  Cost  $110,000 
Eliminate  book  value  at  acquisition: 
Capital  stock:  90%  of  $100,000. .  $90,000 

Surplus:  90%  of     20,000..  18,000 

Goodwill $2,000G 

Sundry  Net  Assets 105,000     $115,000 220,000 

$215,000     $115,000     $108,000     $222,000 

Liabilities 
Capital  Stock: 

Co.  A $200,000  $200,000 

Co.  B $100,000 

Eliminate  holding  company's  90%  $90,000 

Minority  interest  10%  10,000M 

Surplus: 

Co.  A 15,000  15,0003 

Co.B 15,000 

Minority:      10%  of  $15,000  pres- 
ent surplus  1,500M 
Elim.  H.  C:  90%  of  20,000  sur- 
plus at  acquis          18,000 

Surplus:        90%  of     5,000  de- 
crease 4,500*S 

$215,000     $115,000     $108,000     $222,000 

Goodwill  $2,000;  minority  interest  $11,500;  surplus  $10,500. 

Case  DD 

Assets  Co.  A  Co.B         Elim.        C.B.S. 

Investment  in  Stock  of  Co.  B  (90%)  Cost  $110,000 
Eliminate  book  value  at  acquisition: 
Capital  stock:  90%  of  $100,000. .  $90,000 

Surplus:  90%  of     20,000..  18,000 

Goodwill $2,000G 

Sundry  Net  Assets 105,000       $90,000  195,000 

Deficit— Co.  B 10,000 

Minority:      10%  of  $10,000* 

present  deficit 1>OOOM 

Elim.  H.  C:  90%  of  20,000  sur- 
plus at  acquis.         18,000* 

Surplus:        90%  of  30,000   de- 
crease  27,OOOS 

$215,000     $100,000       $90,000     $225,000  ' 

Liabilities 
Capital  Stock: 

Co.  A $200,000  $200,000 

Co.B $100,000 

Eliminate  holding  company's  90%  $90,000 

Minority  interest  10%  10,000M 

Surplus— Co.  A 15,000    15,O0OS 

$215,000     $100,000       $90,000     $225,000 

Goodwill  $2,000;  minority  interest  $10,000  -  $1,000  =  $9,000;  surplus  $15,000  — 
$27,000  =  $12,000  deficit. 


APPENDIX  B  169 

Case  E 

Assets  Co.  A         Co.  B  Elitn.        C.  B.  S. 

Investment  in  Stock  of  Co.  B  (90%). . .  $115,000 
Eliminate  present  book  value: 
Capital  stock:  90%  of  $100,000. .  $90,000 

Surplus:  90%  of     20,000..  18,000 

Goodwill $7,000G 

Sundry  Net  Assets 100,000     $120,000  220,000 

$215,000     $120,000     $108,000     $227,000 

Liabilities  . 
Capital  Stock: 

Co.  A $200,000  $200,000 

Co.  B $100,000 

Eliminate  holding  company's  90%  $90,000 

Minority  interest  10%  10,000M 

Surplus: 

Co.  A 15,000  15,000S 

Co.B 20,000 

Eliminate  holding  company's  90%  18,000 

Minority  interest  10%  2,000M 

$215,000     $120,000     $108,000     $227,000 
Goodwill  $7,000;  minority  interest  $12,000;  surplus  $15,000. 

Casq  P 

Assrts  Co.  A         Co.B  Elitn.        C.  B.  S. 

Investment  in  Stock  of  Co.  B  (90%). . .  $133,000 
Eliminate  present  book  value: 
Capital  stock:  90%  of  $100,000. .  $90,000 

Surplus:  90%  of     40,000..  36,000 

Goodwill $7,000G 

Sundr/ Net  Assets 100,000     $140,000  240,000 

$233,000     $140,000     $126,000     $247,000 

Liabilities 
Capital  Stock: 

Co.  A $200,000  $200,000 

Co.  B $100,000 

Eliminate  holding  company's  90%  $90,000 

Minority  interest  10%  10,000M 

Surplus: 

Co.  A 33,000  33,000S 

Co.  B 40,000 

Eliminate  holding  company's  90%  36,000 

Minority  interest  10%  4,000M 

$233,000     $140,000     $126,000     $247,000 
Goodwill  $7,000;  minority  interest  $14,000;  surplus  $33,000. 


170  CONSOLIDATED  STATEMENTS 

C&sG  G 

Assets  Co.  A         Co.  B  Elim.         C.  B.  S. 

Investment  in  Stock  of  Co.  B  (90%) . . .  $107,800 
Eliminate  present  book  value: 
Capital  stock :  90%  of  $100,000 . .  $90,000 

Surplus:  90%  of     12,000..  10,800 

Goodwill $7,000G 

Sundry  Net  Assets 100,000     $112,000  212,000 

$207,800     $112,000     $100,800     $219,000 

Liabilities 
Capital  Stock: 

Co.  A $200,000  $200,000 

Co.  B $100,000 

Eliminate  holding  company's  90%  $90,000 

Minority  interest  10%  10,000M 

Surplus: 

Co.  A 7,800  7,800S 

Co.  B 12,000 

Eliminate  holding  company's  90%  10,800 

Minority  interest  10%  I,200M 

$207,800     $112,000     $100,800     $219,000 
Goodwill  $7,000;  minority  interest  $11,200;  surplus  $7,800. 

Case  H 

Assets  Co.  A        Co.  B         Elim.        C.  B.  S. 

Investment  in  Stock  of  Co.  B  (90%) . . .    $89,800 
Eliminate  present  book  value: 
Capital  stock:  90%  of  $100,000. .  $90,000 

Deficit:  90%  of       8,000..  7,200* 

Goodwill $7,000G 

Sundry  Net  Assets 100,000       $92,000  192,000 

Deficit: 

Co.  A 10,200  10,200S 

Co.  B 8,000 

Eliminate  holding  company's  90%  7>200 

Minority  interest  10%  800M 

$200,000     $100,000      $90,000     $210,000 

Liabilities 
Capital  Stock: 

Co.  A $200,000  $200,000 

Co.  B $100,000 

Eliminate  holding  company's  90%  $90,000 

Minority  interest  10%  10,000M 

$200,000     $100,000       $90,000     $210,000 
Goodwill  $7,000;  minority  interest  $9,200;  deficit  $10,200. 


APPENDIX  B  171 

Case  EE 

Assets  Co.  A         Co.  B  Elim.        C.  B.  S. 

Investment  in  Stock  of  Co.  B  (90%)  Cost  $115,000 
Eliminate  book  value  at  acquisition: 
Capital  stock:  90%  of  $100,000. .  $90,000 

Surplus:  90%  of     20,000..  18,000 

Goodwill $7,000G 

Sundry  Net  Assets 100,000     $120,000 220,000 

$215.000     $120.000     $108.000     $227,000 

Liabilities 
Capital  Stock: 

Co.  A $200,000  $200,000 

Co.  B $100,000 

Eliminate  holding  company's  90%  $90,000 

Minority  interest  10%  lO.OOOM 

Surplus: 

Co.  A 15,000  15,000S 

Co.  B 20,000 

Minority :      10%  of  $20,000  pres- 
ent surplus ' 2,000M 

Elim.  H.C.:90%of  20,000  sur- 
plus at  acquis 18,000 

$215,000     $120.000     $108.000     $227.000 

Goodwill  $7,000;  minority  interest  $12,000;  surplus  $15,000. 

Case  FF 

Assets  Co.  A         Co.  B  Elim.        C.  B.  S. 

Investment  in  Stock  of  Co.  B  (90%)  Cost  $115,000 
Eliminate  book  value  at  acquisition: 
Capital  stock:  90%  of  $100,000. .  $90,000 

Surplus:  90%  of     20,000..  18,000 

Goodwill $7,000  G 

Sundry  Net  Assets 100.000     $140,000    240,000 

$215,000     $140.000     $108.000     $247.000 

Liabilities 
Capital  Stock: 

Co.  A $200,000  $200,000 

Co.  B $100,000 

Eliminate  holding  company's  90%  $90,000 

Minority  interest  10%  lO.OOOM 

Surplus: 

Co.  A 15,000  1S,000S 

Co.  B 40,000 

Minority:      10%  of  $40,000  pres- 
ent surplus  4,000M 
Elim.  H.C.:90%of  20,000  sur- 
plus at  acquis.        18,000 

Surplus:        90% of  20,000   in- 
crease  IS.OOOS 

$215,000     $140.000     $108,000     $247.000 

Goodwill  $7,000;  minority  interest  $14,000;  surplus  $15,000  +  $18,000  =  $33,000. 


172  CONSOLIDATED  STATEMENTS 

Case  GG 

AsseU  Co.  A         Co.B  Elim.        C.  B.  S. 

Investment  in  Stock  of  Co.  B  (90%)  Cost  $1 15,000 
Eliminate  book  value  at  acquisition: 
Capital  stock :  90%  of  $100,000 . .  $90,000 

Surplus:  90%  of     20,000..  18,000 

Goodwill $7,0000 

Sundry  Net  Assets 100,000     $112,000 212,000 

$215.000     $112,000     $108,000     $219,000 

Liabilities 
Capital  Stock: 

Co.  A $200,000  $200,000 

Co.  B $100,000 

Eliminate  holding  company's  90%  $90,000 

Minority  interest  10%  lO.OOOM 

Surplus: 

Co.  A 15,000  15,000S 

Co.B 12,000 

Minority:      10%  of  $12,000  pres- 
ent surplus  1,200M 
Elim.H.C.:90%of  20,000  sur- 
plus at  acquis.        18,000 

Surplus:        90% of     8,000  de- 
crease  7,200*S 

$215,000     $112,000     $108.000     $219.000 

Goodwill  $7,000;  minority  interest  $11,200;  surplus  $15,000  -  $7,200  =  $7,800. 

Case  HH 

Assets  Co.  A  Co.  B         Elim.        C.  B.  S. 

Investment  in  Stock  of  Co.  B  (90%)  Cost  $115,000 
Eliminate  book  value  at  acquisition: 
Capital  stock:  90%  of  $100,000. .  $90,000 

Surplus:  90%  of     20,000..  18,000 

Goodwill $7,000G 

Sundry  Net  Assets 100,000      $92,000  192,000 

Deficit— Co.  B 8,000 

Minority:      10%  of  $8,000  pres- 
ent deficit 800M 

Elim.  H.  C:  90%  of  20,000   sur- 
plus at  acquis.     18,000* 

Surplus:       90%of  28,000  de- 
crease  25,200S 

$215,000     $100,000      $90,000     $225,000 

Liabilities 
Capital  Stock: 

Co.  A $200,000  $200,000 

Co.B $100,000 

Eliminate  holding  company's  90%  $90,000 

Minority  interest  10%  lO.OOOM 

Surplus— Co.  A 15,000    15.000S 

$215,000     $100,000       $90,000     $225,000 

Goodwill  $7,000;   minority  interest  $9,200;   surplus  $15,000  —  $25,200  =  $10,200 
deficit. 


APPENDIX  B  173 

Case  I 

Jssfts  Co.  J         Co.B  Elim.         C.  B.  S. 

Investment  in  Stock  of  Co.  B  (90%) . . .  $105,000 
Eliminate  present  book  value: 
Capital  stock:  90%  of  $100,000. .  $90,000 

Surplus:  90%  of     20,000..  18,000 

Deduction  from  goodwill $3,000*G 

Sundry  Net  Assets 80,000     $120,000  200,000 

Deficit— Co.A 15,000  15,000S 

$200,000     $120,000     $108,000    $212,000 

Liabilities 
Capital  Stock: 

Co.  A $200,000  $200,000 

Co.  B $100,000 

Eliminate  holding  company's  90%  $90,000 

Minority  interest  10%  10,000M 

Surplus— Co.  B 20,000 

Eliminate  holding  company's  90%  18,000 

Minority  interest  10%  2,000M 

$200,000     $120,000     $108,000     $212,000 
Deduction  from  goodwill  $3,000;  minority  interest  $12,000;  deficit  $15,000. 

C&S6  J 

Assets  Co.A         Co.B  Elim.        C.B.S. 

Investment  in  Stock  of  Co.  B  (90%) . . ,  $123,000 
Eliminate  present  book  value: 
Capital  stock:  90%  of  $100,000. .  $90,000 

Surplus:  90%  of     40,000..  36,000 

Deduction  from  goodwill $3,000*G 

Sundry  Net  Assets 80,000     $140,000  220,000 

$203,000     $140,000     $126,000     $217,000 

Liabilities 
Capital  Stock: 

Co.A $200,000  $200,000 

Co.  B $100,000 

Eliminate  holding  company's  90%  $90,000 

Minority  interest  10%  10,000M 

Surplus: 

Co.  A 3,000  3,000S 

Co.  B. 40,000 

Eliminate  holding  company's  90%  36,000 

Minority  interest  10%  4,000M 

$203,000     $140,000     $126,000     $217,000 
Deduction  from  goodwill  $3,000;  minority  interest  $14,000;  surplus  $3,000. 


174  CONSOLIDATED  STATEMENTS 

CaseK 

Assets  Co.  A        Co.  B  Elim.        C.  B.  S  . 

Investment  in  Stock  of  Co.  B  (90%) . . .   $97,800 
Eliminate  present  book  value: 
Capital  stock:  90%  of  $100,000. .  $90,000 

Surplus:  90%  of     12,000..  10,800 

Deduction  from  goodwill $3,000*G 

Sundry  Net  Assets 80,000     $112,000  192,000 

Deficit— Co.  A 22,200  22,2008 

$200,000     $112,000     $100,800    $211,200 

Liabilitus 
Capital  Stock: 

Co.  A $200,000  $200,000 

Co.  B $100,000 

Eliminate  holding  company's  90%  $90,000 

Minority  interest  10%  10,000M 

Surplus— Co.  B 12,000 

Eliminate  holding  company's  90%  10,800 

Minority  interest  10%  1,200M 

$200,000     $112,000     $100,800     $211,200 
Deduction  from  goodwill  $3,000;  minority  interest  $11,200;  deficit  $22,200. 

CaseL 

Assets  Co.  A         Co.  B         Elim.        C.  B.  S. 

Investment  in  Stock  of  Co.  B  (90%) . . .    $79,800 
Eliminate  present  book  value: 
Capital  stock:  90%  of  $100,000. .  $90,000 

Deficit:  90%  of       8,000..  •  7,200* 

Deduction  from  goodwill $3,000*G 

Sundry  Net  Assets 80,000      $92,000  172,000 

Deficit: 

Co.  A 40,200  40,200  S 

Co.  B 8,000 

Eliminate  holding  company's  90%  7,200 

Minority  interest  10%  800M 

$200,000     $100,000      $90,000     $210,000 

Liabilities 
Capital  Stock: 

Co.  A $200,000  $200,000 

Co.  B $100,000 

Eliminate  holding  company's  90%  $90,000 

Minority  interest  10%  10,000M 

200,000      100,000       90,000      210,000 
Deduction  from  goodwill  $3,000;  minority  interest  $9,200;  deficit  $40,200. 


APPENDIX  B 

Casell 

AsseU  Co.  A         Co.  B 

Investment  in  Stock  of  Co.  B  (90%)  Cost  $105,000 
Eliminate  book  value  at  acquisition: 
Capital  stock:  90%  of  $100,000.. 
Surplus:  90%  of     20,000.. 

Deduction  from  goodwill 

Sundry  Net  Assets 80,000     $120,000 

Deficit— Co.  A 15,000    

$200,000     $120,000 

Liabilities 
Capital  Stock: 

Co.  A $200,000 

Co.  B $100,000 

Eliminate  holding  company's  90% 
Minority  interest  10% 

Surplus— Co.  B 20,000 

Minority:      10%  of  $20,000  pres- 
ent surplus 
Elim.H.C.:90%of  20,000  sur- 
plus at  acquis. 

$200,( 

Deduction  from  goodwill  $3,000;  minority  interest  $12,000; 


Case  JJ 

Assets  Co.  A 

Investment  in  Stock  of  Co.  B  (90%)  Cost  $105,000 
Eliminate  book  value  at  acquisition: 
Capital  stock:  90%  of  $100,000. . 
Surplus:  90%  of     20,000.. 

Deduction  from  goodwill 

Sundry  Net  Assets 80,000 

Deficit— Co.  A 15,000 

$200,000 

Liabilities 
Capital  Stock: 

Co.  A $200,000 

Co.  B.. 

Eliminate  holding  company's  90% 
Minority  interest  10% 

Surplus — Co.  B 

Minority:      10%  of  $40,000  pres- 
ent surplus 
EHm.H.C.:90%of  20,000  sur- 
plus at  acquis.        

Surplus:        90%  of  20,000  in- 
crease   

$200,000 

Deduction  from  goodwill  $3,000;  minority  interest 
or  $3,000. 


175 

Elitn. 

C.  B.  S. 

$90,000 
18,000 

$3,000*G 
200,000 
15,000S 

$108,000 

$212,000 

$90,000 


18,000 


$200,000 


10,000M 


2,000M 


$120,000 

$108,0(X) 

$212,000 

t  $12,000; 

deficit  $15,000. 

Co.B 

Elim. 

C.  B.  S. 

$140,000 

$90,000 
18,000 

$3,000*G 
220,000 
15,000S 

$140,000 

$108,000 

$232,000 

$100,000 
40,000 

$90,000 
18,000 

$200,000 
10,000M 
4,000M 

18,000S 

$140,000 

$108,000 

$232,000 

$14,000;  surplus  $18,000-$15,000, 


176  CONSOLIDATED  STATEMENTS 

CflS6  KK 

Assets  Co.  A         Co.B      "^   Elim.        C.  B.  S. 

Investment  in  Stock  of  Co.  B  (90%)  Cost  $105,000 
Eliminate  book  value  at  acquisition: 
Capital  stock:  90%  of  $100,000. .  $90,000 

Surplus:  90%  of     20,000..  18,000 

Deduction  from  goodwill $3,000*G 

Sundry  Net  Assets 80,000     $112,000  192,000 

Deficit— Co.  A 16,000 15,000S 

$200,000     $112,000     $108,000     $204,000 

Liabilities 
Capital  Stock: 

Co.  A $200,000  $200,000 

Co.  B $100,000 

Eliminate  holding  company's  90%  $90,000 

Minority  interest  10%  10,000M 

Surplus— Co.  B 12,000 

Minority:      10%  of  $12,000  pres- 
ent surplus  1,200M 
Elim.H.C.:90%  of  20,000  sur- 
plus at  acquis.      18,000 

Surplus:        90%  of     8,000    de- 
crease   7,200*S 

$200,000     $112,000     $108,000     $204,000 

Deduction  from  goodwill  $3,000;  minority  interest  $11,200;  deficit  $15,000      $7,200 
=  $22,200. 

Assets  Co.  A  Co.  B         Elim.        C.  B.  S. 

Investment  in  Stock  of  Co.  B  (90%)  Cost  $105,000 
Eliminate  book  value  at  acquisition; 
Capital  stock :  90%  of  $100,000 . .  $90,000 

Surplus:  90%  of     20,000..  18,000 

Deduction  from  goodwill $3,000*G 

Sundry  Net  Assets 80,000       $92,000  172,000 

Deficit: 

Co.  A 15,000  15,O0OS 

Co.  B 8,000 

Minority:      10%  of  $8,000  pres- 
ent deficit  800M 
Elim.  H.  C:  90%  of  20,000    sur- 
plus at  acquis.      18,000* 

Surplus:        90%  of  28,000     de- 
crease      25,200  S 

$200.000     $100,000       $90,000    $210,000 

Liabilities 
Capital  Stock: 

Co.  A $200,000  $200,000 

Co.  B $100,000 

Eliminate  holding  company's  90%  $90,000 

Minority  interest  10% 10,000M 

$200,000     $100,000       $90,000     $210,000 
Deduction  from  goodwill  $3,000;  minority  interest  $9,200;  deficit  $40,200. 


APPENDIX  B  177 

CaseM 

Assets  Co.  A         Co.  B         Elim.        C.  B.  S. 

Investment  in  Stock  of  Co.  B  (90%) . . .   $85,000 
Eliminate  present  book  value: 
Capital  stock:  90%  of  $100,000. .  $90,000 

Deficit:  90%  of     10,000..  9,000* 

Goodwill $4,000G 

Sundry  Net  Assets 130,000       $90,000  220,000 

Deficit— Co.  B 10,000 

Eliminate  holding  company's  90%  9,000 

Minority  interest  10%  1,000M 

$215,000     $100,000      $90,000     $225,000 

Liabilities 
Capital  Stock: 

Co.  A $200,000  $200,000 

Co.  B $100,000 

Eliminate  holding  company's  90%  $90,000 

Minority  interest                    10%  lO.OOOM 

Surplus— Co.  A 15,000  15,000  8 

$215,000     $100,000      $90,000     $225,000 
Goodwill  $4,000;  minority  interest  $9,000;  surplus  $15,000. 


CaseN 

Assets  Co.  A         Co.  B         Elim.        C.B.S. 

Investment  in  Stock  of  Co.  B  (90%) . . .   $92,200 
Eliminate  present  book  value: 
Capital  stock:  90%  of  $100,000. .  $90,000 

Deficit:  90%  of       2,000.,  1,800* 

Goodwill $4,000G 

Sundry  Net  Assets 130,000      $98,000  228,000 

Deficit— Co.  B 2,000 

Eliminate  holding  company's  90%  1,800 

Minority  interest  10%  200M 

$222,200     $100,000      $90,000     $232,200 

Liabilities 
Capital  Stock: 

Co.  A $200,000  $200,000 

Co.  B $100,000 

Eliminate  holding  company's  90%  $90,000 

Minority  interest                    10%  10,000M 

Surplus— Co.A 22,200  22,200S 

$222,200     $100,000      $90,000     $232,200 
Goodwill  $4,000;  minority  interest  $9,800;  surplus  $22,200. 


178  CONSOLIDATED  STATEMENTS 

CaseO 

AsseU  Co.  A         Co.  B  Elin.        C.  B.  S. 

Investment  in  Stock  of  Co.  B  (90%) . . .  $104,800 
Eliminate  present  book  value: 
Capital  stock:  90%  of  $100,000. .  $90,000 

Surplus:  90%  of     12,000..  10,800 

Goodwill $4,000G 

Sundry  Net  Assets 130,000    $112,000  242,000 

$234,800     $112,000     $100,800     $246,000 

LiabilitiiS 
Capital  Stock: 

Co.  A $200,000  $200,000 

Co.  B $100,000 

Eliminate  holding  company's  90%  $90,000 

Minority  interest  10%  10,000M 

Surplus: 

Co.  A 34,800  34,8008 

Co.  B 12,000 

Eliminate  holding  company's  90%  10,800 

Minority  interest  10%  1,200M 

$234,800     $112,000     $100,800     $246,000 
Goodwill  $4,000;  minority  interest  $11,200;  surplus  $34,800. 

fJaoA  P 

AssHs  Co.  A         Co.  B         Elitn.        C.  B.  S. 

Investment  in  Stock  of  Co.  B  (90%) . . .    $77,800 
Eliminate  present  book  value: 
Capital  stock:  90%  of  $100,000. .  $90,000 

Deficit:  90%  of     18,000..  16,200* 

Goodwill $4,000G 

Sundry  Net  Assets 130,000       $82,000  212,000 

Deficit— Co.  B 18,000 

Eliminate  holding  company's  90%  16,200 

Minority  interest  10%  1,800M 

$207,800     $100,000      $90,000     $217,800 

Liabilities 
Capital  Stock: 

Co.  A $200,000  $200,000 

Co.  B $100,000 

Eliminate  holding  company's  90%  $90,000 

Minority  interest                    10%  10,000M 

Surplus— Co.A 7,800  7,800 

$207,800     $100,000      $90,000     $217,800 
Goodwill  $4,000;  minority  interest  $8,200;  surplus  $7,800. 


APPENDIX  B  179 

Cfl.S6  "MT^ff 

Assets  Co.  A         Co.  B         Elim.        C.  B.  S. 

Investment  in  Stock  of  Co.  B  (90%)  Cost  $85,000 
Eliminate  book  value  at  acquisition: 
Capital  stock :  90%  of  $100,000 . .  $90,000 

Deficit:  90%  of     10,000..  9,000* 

Goodwill $4,000G 

Sundry  Net  Assets 130,000      $90,000  220,000 

Deficit— Co.  B 10,000 

Eliminate  holding  company's  90%  9,000 

Minority  interest  10%  1,000M 

$215,000     $100,000       $90,000     $225,000 

Liabilities 
Capital  Stock: 

Co.  A $200,000  $200,000 

Co.  B $100,000 

Eliminate  holding  company's  90%  $90,000 

Minority  interest                    10%  10,000M 

Surplus— Co.A 15,000  15,000S 

$215,000     $100,000       $90,000     $225,000 
Goodwill  $4,000;  minority  interest  $9,000;  surplus  $15,000. 

Case  NN 

Assets  Co.  A         Co.  B  Elim.        C.  B.  S. 

Investment  in  Stock  of  Co.  B  (90%)  Cost  $85,000 
Eliminate  book  value  at  acquisition: 
Capital  stock:  90%  of  $100,000. .  $90,000 

Deficit:  90%  of     10,000..  9,000* 

Goodwill $4,000G 

Sundry  Net  Assets 130,000       $98,000  228,000 

Deficit— Co.  B 2,000 

Minority:      10%  of  $2,000  present 

deficit 200M 

Elim.  H.  C.  90%  of  10,000    deficit 

at  acquis.  9,000 

Suiplus:    90%     of     8,000      gain 
since  acquis 7,200*S 

$215,000     $100,000      $90,000     $225,000 

Liabilities 
Capital  Stock: 

Co.  A $200,000  $200,000 

Co.  B $100,000 

Eliminate  holding  company's  90%  $90,000 

Minority  interest                    10%  10,000M 

Surplus— Co.A 15,000  15,000S 

$215,000     $100,000       $90,000     $225,000 
Goodwill  $4,000;  minority  interest  $9,800;  surplus  $15,000  +  $7,200  =  $22,200. 


180  CONSOLIDATED  STATEMENTS 

Case  00 

Assets  Co.  A         Co.  B         Elim.        C.  B.  S. 

Investment  in  Stock  ofCo.B  (90%)  Cost  $85,000 
Eliminate  book  value  at  acquisition: 
Capital  stock:  90%  of  $100,000. .  $90,000 

Deficit:  90%  of     10,000..  9,000* 

Goodwill $4,000G 

Sundry  Net  Assets 130,000     $112,000  242,000 

$215,000     $112,000       $81.000     $246.000 

Liabilities 
Capital  Stock: 

Co.  A $200,000  $200,000 

Co.  B $100,000 

Eliminate  holding  company's  90%  $90,000 

Minority  interest  10%  10,000M 

Surplus: 

Co.  A 15,000  1S,000S 

Co.  B 12,000 

Minority:     10%  of  $12,000  pres- 
ent surplus  l^OOM 
Elim.  H.  C.  90%  of  10,000   defi- 
cit at  acquis.       9,000* 

Surplus         90%  of  22,000   gain  19,8008 

$215,000     $112,000       $81,000     $246,000 
Goodwill  $4,000;  minority  interest  $11,200;  surplus  $15,000  -\-  $19,800  =  $34,800 

Case  PP 

Assets  Co.  A         Co.  B         Elim.        C.  B.  S. 

Investment  in  Stock  of  Co.  B  (90%)  Cost  $85,000 
Eliminate  book  value  at  acquisition: 
iC/apital  stock:  90%  of  $100,000. .  $90,000 

Deficit:  90%  of     10,000..  9,000* 

Goodwill $4,000G 

Sundry  Net  Assets 130,000       $82,000  212,000 

Deficit— Co.  B 18,000 

Minority:      10%  of  $18,000  pres- 
ent deficit  1,800M 
Elim.  H.  C.  90%  of  10,000  defi- 
cit at  acquis.        9,000 

Surplus         90%  of     8,000  loss.  7,200S 

$215,000     $100,000      $90,000     $225,000 

Liabilities 
Capital  Stock: 

Co.  A $200,000  $200,000 

Co.  B $100,000 

Eliminate  holding  company's  90%  $90,000 

Minority  interest                    10%  10,000M 

Surplus— Co.  A 15,000  15,000S 

$215,000     $100,000       $90,000     $225,000 
Goodwill  $4,000;  minority  interest  $8,200;  surplus  $15,000  —  $7,200  =  $7,800. 


APPENDIX  B  181 

Case  Q  t. 

Assets  Co.  A         Co.B         Elim.       C.B.S. 

Investment  in  Stock  of  Co.  B  (90%) . . .   $80,000 
Eliminate  present  book  value: 
Capital  stock:  90%  of  $100,000. .  $90,000 

Deficit:  90%  of     10,000..  9,000* 

Deduction  from  goodwill $1,000*G 

Sundry  Net  Assets 105,000      $90,000  195,000 

Deficit: 

Co.  A 15,000  15,O0OS 

Co.B.. 10,000 

Eliminate  holding  company's  90%  9,000 

Minority  interest  10%  l.OOOM 

$200,000     $100,000       $90,000     $210,000 

Liabilities 
Capital  Stock: 

Co.  A $200,000  $200,000 

Co.B $100,000 

Eliminate  holding  company's  90%  $90,000 

Minority  interest  10%  lO.OOOM 

$200,000     $100,000      $90,000     $210,000 
Deduction  from  goodwill  $1,000;  minority  interest  $9,000;  deficit  $15,000. 

Case  R 

Assets  Co.  A         Co.  B         Elim.        C.  B.  S. 

Investment  in  Stock  of  Co.  B  (90%) . . .   $87,200 
Eliminate  present  book  value: 
Capital  stock:  90%  of  $100,000. .  $90,000 

Deficit:  90%  of       2,000..  1,800* 

Deduction  from  goodwill $1,000*G 

Sundry  Net  Assets 105,000       $98,000  203,000 

Deficit: 

Co.  A 7,800  7,800S 

Co.  B 2,000 

Eliminate  holding  company's  90%  1,800 

Minority  interest  10%  200M 

$200,000     $100,000      $90,000     $210,000 

Liabilities 
Capital  Stock: 

Co.  A $200,000  $200,000 

Co.  B $100,000 

Eliminate  holding  company's  90%  $90,000 

Minority  interest  10%  10,000M 

$200,000     $100,000      $90,000     $210,000 
Deduction  from  goodwill  $1,000;  minority  interest  $9,800;  deficit  $7,800. 


182  CONSOLIDATED  STATEMENTS 

Case  S 

Assets  Co.  A        Co.B         Elm.       C.  B.  S. 

Investment  in  Stock  of  Co.  B  (90%) . . .   $99,800 
Eliminate  present  book  value: 
Capital  stock:  90%  of  $100,000. .  $90,000 

Surplus:  90%  of     12,000..  10,800 

Deduction  from  goodwill $1,000*G 

Sundry  Net  Assets 105,000    $112,000  217,000 

$204,800     $112,000     $100,800     $216,000 

Liabilities 
Capital  Stock: 

Co,  A $200,000  $200,000 

Co.B $100,000 

•.    Eliminate  holding  company's  90%  $90,000 

Minority  interest  10%  10,000M 

Surplus: 

Co.  A 4,800  4,800S 

Co.  B 12,000 

Eliminate  holding  company's  90%  10,800 

Minority  interest  10%  1,200M 

$204,800     $112,000     $100,800     $216,000 
Deduction  from  goodwill  $1,000;  minority  interest  $11,200;  surplus  $4,800. 

Case  T 

Assets  Co.  A         Co.  B         Elim.       C.  B.  S. 

Investment  in  Stock  of  Co.  B  (90%) . . .    $72,800 
Eliminate  present  book  value: 
Capital  stock:  90%  of  100,000 . .  $90,000 

Deficit:.  90%  of     18,000..  16,200* 

Deduction  from  goodwill $1,000*G 

Sundry  Net  Assets 105,000      $82,000  187,000 

Deficit: 

Co.  A 22,200  22,200S 

Co.B.. 18,000 

Eliminate  holding  company's  90%  16,200 

Minority  interest  10%  1,800  M 

$200,000     $100,000      $90,000    $210,000 

Liabilities 
Capital  Stock: 

Co.  A $200,000  $200,000 

Co.  B $100,000 

Eliminate  holding  company's  90%  $90,000 

Minority  interest  10%  10,0OOM 

$200,000     $100,000      $90,000     $210,000 
Deduction  from  goodwill  $1,000;  minority  interest  $8,200;  deficit  $22,200. 


APPENDIX  B  183 

Case  QQ 

Assets  Co.  A         Co.  B          Elim.        C.  B.  S. 

Investment  in  Stock  of  Co.  B  (90%)  Cost  $80,000 
Eliminate  book  value  at  acquisition: 
Capital  stock:  90%  of  $100,000. .  $90,000 

Deficit:  90%  of     10,000..  9,000* 

Deduction  from  goodwill $1,000*G 

Sundry  Net  Assets 105,000      $90,000  195,000 

Deficit: 

Co.  A 15,000  15,000S 

Co.  B 10,000 

Minority       10%  of  $10,000  pres- 
ent deficit l.OOOM 

Elim.  H.  C.  90%  of   10,000  defi- 
cit at  acquis 9,000 

$200,000     $100,000      $90,000    $210,000 

Liabilities 
Capital  Stock: 

Co.  A $200,000  $200,000 

Co.  B $100,000 

Eliminate  holding  company's  90%  $90,000 

Minority  interest  10% $10,000M 

$200.000     $100,000       $90,000     $210,000 

Deduction  from  goodwill  $1,000;  minority  interest  $9,000;  deficit  $15,000. 

Case  RR 

Assets  Co.  A  Co.  B  Elim.        C.  B.  S. 

Investment  in  Stock  of  Co.  B  (90%)  Cost  $80,000 
Eliminate  book  value  at  acquisition: 
Capital  stock:  90%  of  $100,000. .  $90,000 

Deficit:  90%  of     10,000..  9,000* 

Deduction  from  goodwill $1,000*G 

Sundry  Net  Assets 105,000       $98,000  203,000 

Deficit: 

Co.  A 15,000  15,000S 

Co.  B 2,000 

Minority:      10%  of  $2,000  pres- 
ent deficit  200  M 
Elim.  H.  C.  90%  of  10,000  defi- 
cit at  acquis. 9,000 

Surplus         90%  of  8,000  gain 7,200  *S 

$200.000     $100.000       $90.000    $210.000 

Liabilities 
Capital  Stock: 

Co.  A $200,000  $200,000 

Co.  B $100,000 

Eliminate  holding  company's  90%  $90,000 

Minority  interest  10% 10,000M 

$200,000     $100.000       $90,000     $210.000 

Deduction  from  goodwill  $1,000;  minority  interest  $9,800;  deficit  $15,000  -  $7,200  = 
$7,800. 


184  CONSOLIDATED  STATEMENTS 

Case  SS 

Assets  Co.  A         Co.  B         Elim.        C.  B.  S. 

Investment  in  Stock  of  Co.  B  (90%)  Cost  $80,000 
Eliminate  book  value  at  acquisition: 
Capital  stock:  90%  of  $100,000. .  $90,000 

Deficit:  90%  of     10,000..  9,000* 

Deduction  from  goodwill $1,000*G 

Sundry  Net  Assets 105,000     $112,000  217,000 

Deficit— Co.  A 15,000 15,000S 

$200.000     $112.000       $81,000     $231,000 

Liabilities 
Capital  Stock: 

Co.  A $200,000  $200,000 

Co.  B $100,000 

Eliminate  holding  company's  90%  $90,000 

Minority  interest  10%  10,000M 

Surplus— Co.  B 12,000 

Minority:      10%  of  $12,000  pres- 
ent surplus  1,200M 
Elim.  H.  C.  90%  of  10,000  defi- 
cit at  acquis.      9,000* 

Surplus         90%  of  22,000  fiain 19.800 

$200.000     $112.000       $81,000     $231.000 

Deduction  from  goodwill  $1,000;  minority  interest  $11,200;  surplus  $19,800  -  $15,000 
=  $4,800. 

Case  TT 

Assets  Co.  A         Co.  B         Elim.        C.  B.  S. 

Investment  in  Stock  of  Co.  B  (90%)  Cost  $80,000 
Eliminate  book  value  at  acquisition: 

Capital  stock:  90%  of  $100,000. .  $90,000 

Deficit:  90%  of     10,000..  9,000* 

Deduction  from  goodwill $1,000*G 

Sundry  Net  Assets 105,000       $82,000  187,000 

Deficit:  ' 

Co.  A ..;.:....-  15,000  15,000S 

Co.  B •        18,000 

Minority:      10%  of  $18,000  pres- 
ent deficit  1,800M 
Elim.  H.  C.  90%  of   10,000  defi- 
cit at  acquis.           9,000 

Surplus         90%  of     8,000  loss. 7,200S 

$200.000     $100,000       $90,000    $210,000 

Liabilities 
Capital  Stock: 

Co.  A $200,000  $200,000 

Co.  B $100,000 

■  Eliminate  holding  company's  90%  $90,000 

Minority  interest  10% lO.OOOM 

$200.000     $100,000       $90.000     $210,000 

Deduction  from  goodwill  $1,000;  minority  interest  $8,200;  deficit  $15,000  +  $7,200  = 
$22,200. 


APPENDIX  C 

SOLUTIONS  TO  PROBLEMS  IN  APPENDIX  A 
Solution  to  problem  1. 

JOURNAL    ENTRIES  ON  THE   BOOKS  OF  THE  HOLDING  COMPANY 

February,  igos 

Investment  in  Stock  of  Company  A «  $168,750.00 

Cash '  $168,750.00 

To  record  the  purchase  of  three-fourths  of  the  stock  of 
Company  A,  at  book  value  at  December  31, 1904. 

Capital  Stock $150,000 

Surplus 75,000 

Total $225,000 

Three-fourths  thereof  =  $168,750. 

March,  igoS 

Investment  in  Stock  of  Company  B 416,666.6/ 

Cash 416,666.67 

To  record  the  purchase  of  two-thirds  of  the  stock  of 
Company  B,  at  book  value  at  December  31,  1904. 

Capital  Stock $500,000 

Surplus 125,000 

Total $625,000 

Two-thirds  thereof  =  $413,333.33 

January,  1906 

Investment  in  Stock  of  Company  A 3,750.00 

Income  from  Investment  in  Company  A 3,750.00 

To  take  up  our  three-fourths  of  the  net  profits  of  Com- 
pany A  as  shown  by  their  profit  and  loss  statement  for 
the  year  1905. 

January,  IQ06 

Investment  in  Stock  of  Company  B 33,333 .33 

Income  from  Investment  in  Company  B 33,333.33 

To  take  up  our  two-thirds  of  the  net  profits  of  Company 
B  as  shown  by  their  profit  and  loss  statement  for  the 
year  1905. 

185 


186  CONSOLIDATED  STATEMENTS 

February  IS,  1906 

Dividends  Receivable — Company  A $11,250.00 

Investment  in  Stock  of  Company  A $11,250.00 

To  record  declaration  of  dividend  of  10%  by  Company  A 

Cash 11,250.00 

Dividends  Receivable — Company  A 11,250,00 

To  record  receipt  of  dividend  on  stock  of  Company  A 

Note. — ^The  problem  does  not  indicate  any  interval  between 
the  declaration  and  payment  of  the  dividend.  The  above 
entries  are  given  to  indicate  how  the  facts  would  be  recorded  if 
there  had  been  an  interval.  The  following  single  entry  in  the 
case  of  Company  B  shows  how  the  facts  may  be  recorded  when 
no  time  intervenes  between  the  declaration  and  payment  of 
the  dividend. 

February  14, 1906 

Cash $26,666.67 

Investment  in  Stock  of  Company  B $26,666.67 

To  record  reduction  of  investment  by  reason  of  payment 
by  Company  B  of  a  dividend  of  8%. 

These  entries  indicate  the  proper  method  of  recording  earn- 
ings of  and  dividends  from  subsidiaries,  as  explained  in  Chapter 
VII.  The  holding  company  should  take  up  as  income  its  share 
of  the  profits  of  the  subsidiary,  and  not  the  dividends  which  it 
receives.  In  the  case  of  Company  A,  its  share  of  the  earnings 
was  only  $3,750,  although  it  received  dividends  of  $11,250. 
$7,500  of  the  cash  received  was  therefore  a  conversion  of  the 
investment  into  cash.  If  the  entire  dividend  had  been  treated 
as  income  the  earnings  for  the  year  would  have  been  over- 
stated, as  would  also  the  carrying  value  of  the  investment.  On 
the  other  hand,  Company  B  did  not  declare  dividends  equal  to 
its  earnings.  If  the  holding  company  had  taken  up  only  its 
share  of  the  dividends  as  income,  its  earnings  for  the  year 
would  have  been  understated,  and  the  carrying  value  of  the 
investment  in  Company  B  stock  would  also  have  been  under- 
stated. 

It  will  be  noted  that  the  stock  of  Company  A  was  purchased 
in  February  and  the  stock  of  Company  B  was  purchased  in 
March.  The  question  arises  as  to  whether  any  consideration 
should  be  given  to  this  fact  in  the  entries  for  the  stock  pur- 
chases and  the  profits  for  the  year,  as  well  as  in  the  preparation 
of  the  consolidated  balance  sheet. 


APPENDIX  C  187 

The  entries  for  the  purchase  would  not  be  affected,  even  if  it 
were  certain  that  profits  had  accrued  at  the  dates  of  purchase, 
for  the  investment  accounts  should  be  charged  with  the  price 
paid  regardless  of  the  book  value  at  the  date  of  acquisition. 

As  to  the  entries  for  income  determined  at  the  end  of 
the  year,  it  must  be  remembered  that  the  law  does  not 
consider  corporate  profits  as  accruing  from  day  to  day.  More- 
over, seasonal  fluctuations  usually  make  it  unsafe  to  assume 
that  profits  are  made  in  uniform  amounts  throughout  the  year. 
These  facts,  together  with  the  added  fact  that  Company  C 
clearly  paid  nothing  for  accrued  profits,  justify  the  holding 
company  in  considering  as  profits  its  share  of  the  year's  income 
of  the  two  companies. 

In  preparing  the  consolidated  balance  sheet,  the  book  value 
at  the  date  of  the  balance  sheet  will  be  eliminated  from  the 
investment  account.  Since  the  balance  of  the  investment 
account  is  exactly  equal  to  the  book  value  of  the  stock  held, 
there  will  be  no  goodwill  element.  It  may  be  contended  that 
the  book  value  of  the  stock  of  each  company  at  the  date  of 
purchase  was  actually  in  excess  of  the  purchase  price  because  of 
profits  earned  since  the  first  of  the  year,  and  that  there  was 
therefore  a  negative  goodwill  item  involved  in  the  stock 
purchase.    There  are  three  objections  to  accepting  this  theory. 

In  the  first  place,  even  if  the  theory  were  accepted  as  sound, 
there  is  no  sure  way  of  determining  just  how  much  profit  was 
earned  up  to  the  date  of  purchase  and  hence  no  way  of  ascertain- 
ing the  amount  of  the  negative  goodwill. 

In  the  second  place,  if  a  negative  goodwill  is  to  be  arrived  at 
in  the  consolidated  working  papers,  the  balance  of  the  invest- 
ment account  must  be  less  than  the  book  value  at  the  date  of 
the  balance  sheet.  To  have  the  balance  of  the  investment 
account  less  than  book  value  at  the  end  of  1906,  it  would  be 
necessary  to  charge  the  investment  account  with  only  that 
portion  of  the  year's  profit  earned  by  the  subsidiary  after  the 
holding  company  acquired  the  stock.  It  has  already  been 
shown  that  it  is  proper  for  the  holding  company  to  take  up  the 
entire  year's  profit. 

In  the  third  place,  assuming  for  the  sake  of  argument  that 
it  would  be  possible  to  prorate  the  year's  profits,  and  that  it 
would  be  proper  to  take  up  only  the  profits  earned  after  acquisi- 
tion, the  results  in  this  case  would  be  the  same  so  far  as  the 
consolidated  balance  sheet  is  concerned.    There  are  no  goodwill 


188  CONSOLIDATED  STATEMENTS 

accounts  on  the  books  of  the  subsidiaries  and  hence  the  excess 
of  book  value  over  purchase  price  arising  from  profits  between 
January  1  and  the  dates  of  acquisition  could  not  be  treated  as 
negative  goodwill  to  be  offset  against  goodwill  accounts,  but 
would  be  added  to  the  surplus  on  the  consolidated  balance 
sheet. 


APPENDIX  C  189 

Solution  to  problem  2. — 

X  Y  Z  COMPANY  AND  SUBSIDIARY 

Consolidated  Balance  Sheet — Working  Papers 

January  1, 1910 

Assets  XYZCo.    PQCo.  I. Co.  Elim.  C.  B.  S. 

Real  Estate $50,000      $25,000  $75,000 

Building,  Plant  and  Equipment 75,000        45,000  120,000 

GoodwiU 25,000  25,000G 

Investment  in  P  Q  Co.  (100%)  Cost. . .    150,000 
Eliminate  book  value  at  acquisition: 

Capital  stock $100,000 

Surplus 25,000 

GoodwiU 25,00OG 

Inventories 80,000        20,000  100,000 

Accounts  Receivable 70,000        85,000        15,000      140,000 

$450,000    $175,000    $140,000    $485,000 


Liabilities 

Accounts  Payable $50,000      $50,000      $15,000      $85,000 

Loans 50,000  50,000 

Capital  Stock: 

XYZCompany 250,000  250,000 

PQ  Company 100,000 

Eliminate     holding     company's 

100% 100,000 

Surplus: 

X  Y  Z  Company  100,000  100,000S 

P  Q  Company. 25,000 

Eliminate  holding  company's 
100%  at  acquisition 25,000 

$450,000      $175,000    $140,000    $485,000 


190 


CONSOLIDATED  STATEMENTS 


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APPENDIX  C  193 

COMPANY  A  AND  SUBSIDIARIES  B  AND  C 

Consolidated  Balance  Sheet 

June  30, 1917 

Assets  Liabilities 

Property  and  Goodwill $2,730,000        Capital  Stock $2,250,000 

Current  Assets 940,000        Capital  Surplus 230,000 

Surplus 790,000 

Current  Liabilities 400,000 

$3,670,000  $3,670,000 


The  $230,000  excess  of  book  value  of  Company  C*s  stock 
over  the  purchase  price  is  shown  on  the  balance  sheet  as 
capital  surplus.  Company  C  has  no  goodwill  account,  and 
the  value  of  its  property  at  January  1,  the  date  of  acquisition, 
was  established  by  appraisal;  moreover,  C's  profits  for  the  half 
year  were  four  per  cent  of  its  capital  stock,  or  on  the  basis  of 
eight  per  cent  per  annum.  It  is  difiicult  to  see  how  this  advan- 
tageous purchase  lessens  the  value  of  the  goodwill  on  the  books 
of  A  or  B,  or  the  goodwill  arising  from  A's  purchase  of  B's  stock. 


APPENDIX  C  195 

Solution  to  problem  4. 

(^)  Effect  on  Balance  Sheet  of  Company  B,  the  Subsidiary. 

BALANCE  SHEET  OF  COMPANY  B  (before  paying  dividend) 

Cash* $  25,000        Capital  Stock $100,000 

Other  Net  Assets 125,000        Surplus 50,000 

$150,000  $150,000 

*  Cash  assumed  to  be  on  hand  because  used  for  dividend. 

BALANCE  SHEET  OF  COMPANY  B  (after  paying  dividend) 

Other  Net  Assets $125,000        Capital  Stock $100,000 

Surplus 25,000 

$125,000  $125,000 

The  dividend  causes  a  reduction  of  $25,000  in  the  cash  and  the  surplus. 

{B)  Effect  on  Balance  Sheet  of  Company  A,  the  Holding  Company. 

The  dividend  would  increase  Company  A's  cash  $24,500.  If  Company  A  treated 
the  dividend  as  a  reduction  of  the  investment  account,  the  balance  would  be 
reduced  from  $196,000  to  $171,500.  If  the  dividend  was  treated  as  income,  the 
investment  account  would  remain  unchanged  and  the  surplus  would  be  increased 
$24,500.  This  would  be  misleading  because  it  would  make  the  dividend  appear 
to  be  an  earning  of  Company  A,  whereas  in  reality  it  was  merely  a  conversion 
of  part  of  its  investment  in  the  subsidiary  into  cash. 

BALANCE  SHEET  OF  COMPANY  A  (before  dividend) 

(C)  Effect  on  the  ConsolidaUd  Balance  Sheet. 

CONSOLIDATED  WORKING  PAPERS  (before  dividend) 

Assets  Co.  A         Co.  B         Elim.         C.  B.  S. 

Investment  in  Stock  of  Co.  B $196,000 

Eliminate  book  value: 
Capital  stock:  98%  of  $100,000. .  $98,000 

Surplus:  98%  of     50,000..  49,000 

Goodwill $49,000G 

Cash $25,000  25,000 

Other  Net  Assets 125,000  125,000 

Liabilities 

Capital  Stock 100,000 

Eliminate  Co.  A's  98% 98,000 

Minority  2% 2,000M 

Surplus 50,000 

Eliminate  Co.  A's  98% 49,000 

Minority  2% 1,000M 


196  CONSOLIDATED  STATEMENTS 

CONSOLIDATED  WORKING  PAPERS  (after  dividend) 

(On  assumption  that  holding  company  credited  dividend  to  Investment) 

Assets  Co.  A         Co.  B  Elim.        C.  B.  S. 

Investment  In  Stock  of  Co.  B $171,500 

Eliminate  present  book  value: 
Capital  stock:  98%  of  $100,000. .  $98,000 

Surplus:  98%  of     25,000..  24,500 

Goodwill $49,000 

Cash 24,500  24,500 

Other  Net  Assets $125,000  125,000 

Liabilities 

Capital  Stock 100,000        98,000  2,000M 

Surplus 25,000 

Elim.  Co.  A's  98%  of  $25,000  pres- 
ent surplus 24,500 

Minority          2%  of  25,000   pres- 
ent surplus 500M 

CONSOLIDATED  WORKING  PAPERS  (after  dividend) 

(On  assumption  that  holding  company  credited  the  dividends  to  surplus) 

Assets  Co.  A         Co.  B  Elim.        C.  B.  S. 

Investment  in  Stock  of  Co.  B  (98%)  Cost  $196,000 
Eliminate  book  value  at  acquisition: 
Capital  stock:  98%  of  $100,000. .  $98,000 

Surplus:  98%  of     50,000..  49,000 

Goodwill $49,000 

Cash 24,500  24,500 

Other  Net  Assets $125,000  125,000 

Liabilities 

Capital  Stock 100,000 

Eliminate  holding  company's  98%.  98,000 

Minority  2%.  2,000M 

Surplus: 

Co.  A $24,500  24,500  S 

Co.  B 25,000 

Minority:       2%  of  $25,000  pres- 
ent surplus 500M 

Elim.Co.A's  98%  of  50,000  sur- 
plus at  acquis 49,000 

Surplus         98%  of  25,000  de- 
crease   24,500*S 

The  consolidated  balance  sheet  will  be  the  same  no  matter 
whether  the  holding  company  credits  the  dividend  to  the  invest- 
ment account  or  to  the  surplus  account.  It  will  differ  from  the 
consolidated  balance  sheet  prior  to  the  dividend  in  two  par- 
ticulars: the  cash  and  the  minority  interest  will  each  be  $500 
smaller  than  before  because  of  the  cash  paid  to  the  outside 
stockholders. 


¥ 


APPENDIX  C  197 

Solution  to  problem  5. — Since  the  holding  company  is  carry- 
ing its  investments  at  cost,  the  eliminations  will  be  based  on 
the  book  value  of  the  subsidiaries'  stock  at  the  dates  of  acquisi- 
tion. Therefore  it  is  necessary  to  determine  the  surplus  of  each 
company  at  the  date  when  the  holding  company  acquired  its 
stock. 

Company  B. — ^The  date  of  acquisition  was  January  1,  1910, 
and  B's  surplus  at  that  date  was  $100,000,  as  shown  in  its 
balance   sheet. 

Company  C. — (Date  of  acquisition — July  1,  1908.) 

Deficit,  January  1, 1906 $250,000 

Add  Profits  from  January  1,  1906,  to  July  1,  1908: 

Profits  from  January  1,  1906,  to  Dec.  31,  191?  =  $650,000 
These  profits  are  assumed  to  have  been  made  in  uniform  amounts 
monthly.    Then  if 
$650,000  =  Profits  for  8  years 
81,250  =  Profits  for  1  year 
From  January  1,  1906,  to  July  1, 1908,  is  2^  years 
Then  $81,250  x  2>^  =  203,125 

Deficit  at  July  1, 1908 $46,875 

Company  D. — (Date  of  acquisition — June  30,  1912.) 

Surplus,  January  1,  1911 $300,000 

Add  Profits  for  1911 600,000 

Total 900,000 

Less  Dividends  declared  in  1911 900,000 

Balance  at  January  1,  1912 0 

Loss,  January  1,  1912,  to  June  30,  1912 50,000 

Deficit,  June  30,  1912 $50j)Q0 


198 


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200  CONSOLIDATED  STATEMENTS 

COMPANY  A  AND  SUBSIDIARIES 

Consolidated  Balance  Sheet 

December  31, 1913 

Assets  LiahUittes 

Goodwill %  947,812.50        Capital  Stock $2,000,000.00 

Other  Sundry  Assets 1,400,000 .00        Surplus 1,387,812 .  50 

Fixed  Assets 1 ,700,000 .  00  Minority  Interest : 

Current  Assets 1,250,000 .00  Co.  B  (25%)    $250,000 

Deferred  Charges 250,000.00  Co.  C  (30%)      210,000 

Co.  D  (20%)     200,000      660,000.00 

Collateral  Trust  5%  Notes    1,000,000.00 
Current  Liabilities  500,000.00 

$5,547,812.50  $5,547,812.50 


APPENDIX  C  201 

Solution  to  problem  6. — 

THE  BROWN  COMPANY  AND  SUBSIDIARY 

Consolidated  Balance  Sheet — ^Working  Papers 

December  31, 1917 

InUr  Co. 
Assets  Brown  Co.    Black  Co.  Eliminations  C.  B.  S. 

Real  Estate,  Buildings  and  Machinery     $200,000     $460,000  $660,000 

Patents  and  Goodwill 350,000  350,000 

Investment  in  Black  Co.  (1,800  shares, 

par  100)  Cost 270,000 

Eliminate  book  value  at  acquisition: 

Capital  stock $180,000 

Surplus* :  90%  of  $30,000 27,000 

Goodwill 63,000  G 

Inventory 410,000       130,000  540,000 

Bills  and  Accounts  Receivable 320,000        80,000  400,000 

Cash 70,000  2,000  72,000 

Advances  to  Black  Company 130,000  130,000 

$1,750,000     $672,000     $337,000  $2,085,000 


*  The  surplus  of  the  Black  Company  at  March  31, 1917,  the  date  when  the  Brown  Company  acquired 
the  stock,  was: 

Surplus  at  January  i,  1917 $15,000 

Eaiiungs  to  March  31  (M  of  $60,000) iS.ooo 

Surplus  at  date  of  acquisition 30,000 

Liabilities 
Capital  Stock: 

Brown  Company $500,000  $500,000 

Black  Company $200,000 

Eliminate   holding   company's 

1,800  shares $180,000 

Minority  interest 20,000M 

Bills  Payable 405,000       205,000  610,000 

Accounts  Payable 375,000        62,000  437,000 

Advances  from  Brown  Company 130,000       130,000 

Surplus: 

Brown  Company 470,000  470,000  S 

Black  Company 75,000 

Minority:        10%  of  $75,000 

present  surplus 7,500M 

Elim.  H.  C.'s  90%  of    30,000 
surplus  at  acquisition 27,000 

Surplus  90%  of    45,000 

increase  since  acquisition . . .  40,500  S 

$1,750,000     $672,000     $337,000  $2,085,000     • 


202  CONSOLIDATED  STATEMENTS 

THE  BROWN  COMPANY  AND  SUBSIDIARY 

Consolidated  Baiance  Sheet 

December  31, 1917 

Assets 

Fixed  Assets: 

Real  Estate,  Buildings  and  Machinery $660,000 

Patents  and  Goodwill 413,000    $1,073,000 

Current  Assets: 

Inventory 540,000 

Bills  and  Accounts  Receivable 400,000 

Cash 72,000      1,012,000 


$2,085,000 


Liabilities 

Capital: 

Capital  Stock 500,000 

Surplus 510,500    $1,010,500 

Minority  Interest: 

10%  Interest  in  the  Black  Company 27,500 

Current  Liabilities: 

Bills  Payable 610,000 

Accounts  Payable 437,000      1.047,000 

$2,085,000 


President , 

The  Brown  Company. 
Dear  Sir: 

If  you  desire  a  certified  balance  sheet  of  the  Brown  Company  alone  at 
December  31,  1917,  I  should  be  willing  to  certify  to  such  a  statement  after 
auditing  your  books.  In  fact,  unless  I  audit  the  books  of  the  Black  Company 
also,  the  only  balance  sheet  to  which  I  could  append  an  unqualified  certificate 
would  be  one  of  the  Brown  Company  alone,  showing  your  investment  in  the 
Black  Company  at  cost. 

Such  a  balance  sheet  is  not  as  desirable,  however,  as  a  consolidated 
balance  sheet,  for  two  reasons.  In  the  first  place,  the  cost  of  the  stock, 
$270,000,  and  the  advances,  $130,000,  represent  a  total  investment  of  $400,000 
in  the  subsidiary.  You  virtually  own  the  Black  Company,  and  a  con- 
solidated balance  sheet  showing  the  assets  and  liabilities  which  this  investment 
represents,  with  the  interest  of  the  minority  stockholders  therein,  is  a  much 
more  comprehensive  and  satisfactory  statement  of  your  financial  condition. 

In  the  second  place,  your  balance  sheet  alone  does  not  do  you  justice. 
ShoMring  the  investment  account  and  the  advances  would  raise  a  question 
in  the  minds  of  the  readers  of  your  balance  sheet  as  to  whether  the  net  assets 
of  the  Black  Company  are  good  enough  in  nature  and  sufficient  in  amount 
to  warrant  so  heavy  an  investment  and  such  large  advances.  A  consolidated 
balance  sheet  taking  up  the  Black  Company's  assets  and  liabilities  would 
show  clearly  that  the  financial  condition  of  the  organization  is  sound  and 
would  allay  any  doubts.  Moreover,  if  I  were  to  certify  to  your  balance 
sheet  alone,  without  an  audit  of  the  books  of  the  subsidiary  to  verify  their 
profits,  I  could  show  only  your  own  surplus  of  $470,000;  but  in  a  consolidated 
balance  sheet,  if  the  profits  of  the  Black  Company  are  correctly  stated,  I  could 
take  up  your  90%  of  the  earnings  since  March  31,  when  you  acquired  the 
stock.  This  addition  of  $40,500  would  make  your  surplus  in  the  consolidated 
balance  sheet  $510,500. 

Yours  very  truly, 


APPENDIX  C  '  203 

Solution  to  problem  7. — Since  the  holding  company  is  taking 
up  its  proportion  of  subsidiary  dividends  as  income,  it  is 
evidently  their  intention  to  carry  the  investment  accounts  at 
cost,  but  they  have  confused  their  records  so  far  as  the  X  Y 
stock  is  concerned  by  crediting  the  investment  account  with 
the  selling  price  of  the  100  shares  sold,  so  that  the  balance  of 
the  account  no  longer  represents  the  cost  of  the  800  shares  still 
held.  Therefore  the  profit  on  the  shares  sold  must  be  ascer- 
tained and  the  investment  account  adjusted. 

Balance  of  X  Y  Co.  investment  account 800  shares        $115,000 

Add  back  selling  price  of 100      "  20,000 

Cost  of 900      "  135,000 

Cost  per  share 150 

Cost  of  800  shares  srill  held 120,000 

Cost  of  100  shares  sold 15,000 

The  investment  account  should  be  raised  to  $120,000,  the 
cost  of  the  800  shares  retained,  and  Surplus  should  be  credited 
with  the  $5,000  profit  realized  by  selHng  for  $20,000  the  100 
shares  which  cost  $15,000.  This  is  accomplished  by  the  follow- 
ing entry: 

Investment  in  X  Y  Co.  Stock $5,000 

Surplus $5,000 

To  adjust  the  investment  account  to  $120,000,  the  cost  of 
800  shares  still  owned,  and  to  take  up  the  $5,000  profit 
on  the  sale  at  200  of  100  shares  which  cost  150. 

Since  the  P  Q  Company  investment  account  contains  the 
cost  of  two  purchases,  it  will  be  well  to  divide  the  balance  of 
the  account  into  two  amounts  representing  the  cost  of  the 
various  purchases,  so  that  the  goodwill  element  may  be  meas- 
ured by  elimination  of  book  values  at  the  respective  dates. 
The  cost  of  the  two  purchases  is  ascertained  thus: 

Balance  of  P  Q  Co.  investment  account — cost  of 900  shares    $82,000 

Cost  of  June  30th  purchase  at  par 100      "  10,000 

Cost  of  first  purchase 800      "        $72,000 


204 


CONSOLIDATED  STATEMENTS 


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206  CONSOLIDATED  STATEMENTS 

The  various  eliminations  are  based  on  surplus  accounts  at 
dates  of  acquisition,  as  follows: 

X  Y  stock  purchase  on  January  1,  1913:  Surplus  of  X  Y  Co.  at  that  date  $60,000 
P  Q  stock  purchase  on  January  1,  1913:  Surplus  of  P  Q  Co.  at  that  date  10,000 
P  Q  stock  purchase  on  June  30, 1913:  Surplus  of  P  Q  Company  at  that  date: 

Surplus  at  January  1 10,000 

Add  one-half  of  1913  profits . .     1 7,500 

Surplus  at  June  30 $27,500 


To  simplify  the  working  papers,  the  various  elements  affect- 
ing the  surplus  at  December  31,  1913,  are  combined  as  follows: 

ABCo.  XYCo.  PQ  Co. 

Surplus,  January  1,  1913 $50,000  $60,000  $10,000 

Profits,  1913 44,000  45,000  35,000 

Profit  on  sale  of  X  Y  Co.  stock 5,000 

Total 99,000        105,000  45,000 

Less  Dividends  paid  in  1913 30,000  40,000  25,000 

Surplus,  December  31, 1913 $69,000        $65,000        $20,000 


THE  A  B  COMPANY  AND  SUBSIDIARIES 

Consolidated  Balance  Sheet 

December  31,  1913 

Assets 

Goodwill $73,250 

Properties 160,000 

Current  Assets 357,000 

$590,250 

Liabilities 

Capital  Stock $300,000 

Surplus 80,250 

Minority  Interests: 

X  Y  Co.— 20% $33,000 

PQCo.— 10% 12,000        45,000 

Accounts  Payable 165,000 

$590,250 


All  stock  purchases  were  made  at  less  than  book  value.  The 
excess  of  book  value  over  cost  is  deducted  from  the  holding 
company's  goodwill  account  as  a  more  conservative  treatment 
than  adding  the  excess  to  surplus. 


APPENDIX  C  207 

Solution  to  problem  8. — ^The  investment  accounts  appear  to 
be  carried  at  cost,  and  hence  the  book  value  of  the  stocks  at  the 
date  of  acquisition  should  be  eUminated.  The  problem,  how- 
ever, does  not  contain  any  information  as  to  the  dates  of 
acquisition  nor  the  book  value  of  the  subsidiaries  at  the  re- 
spective dates.  Therefore  all  that  can  be  done  is  to  ehminate 
the  entire  cost  of  the  stock  from  the  investment  accounts,  and 
an  equal  amount  from  the  subsidiaries'  capital  stock  and  sur- 
plus. If  the  holding  company  paid  more  than  book  value  at 
the  date  of  acquisition  the  elimination  will  be  greater  than  it 
should  be,  with  the  result  that  the  consolidated  balance  sheet 
will  understate  the  goodwill  and  the  surplus;  on  the  other  hand, 
if  the  holding  company  paid  less  than  book  value,  the  con- 
soHdated  balance  sheet  will  overstate  the  goodwill  and  the 
surplus. 

The  finished  goods  on  consignment  are  carried  at  $100,000 
while  their  cost  was  $60,000.  The  $40,000  unrealized  profit 
will  have  to  be  eliminated,  and  no  consideration  should  be  given 
to  the  $10,000  estimated  profit  on  realization. 

Since  the  note  brokers  and  bankers  will  lend  money  to  in- 
dividual companies  and  not  to  the  organization  as  a  whole, 
their  security  will  depend  upon  the  financial  condition  of  the 
company  to  which  the  loan  is  made.  Therefore  it  would  be 
well  to  present  these  facts  as  well  as  the  consolidated  figures 
in  the  balance  sheet,  in  columnar  form,  as  shown  on  pages 
210-211. 


208 


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APPENDIX  C  215 

THE  SAFETY  RAZOR  COMPANY 
AND  ITS  SUBSIDIARIES,  THE  L  W  COMPANY  AND  THE  STEEL  BLADE 

COMPANY 

Consolidated  Balance  Sheet 

December  31, 1912 

Assets 
Fixed  Assets: 

Goodwill $1,630,000 

Properties  and  Plant 650,000    $2,280,000 

Current  Assets: 

Inventories 450,000 

Receivables 300,000 

Cash 370,000      1,120,000 

Deferred  Charges: 

Organization  Expense 75,000 

$3,475,000 


Liabilities 
Capital: 

Preferred  Stock 1,500,000 

Common  Stock 1,500,000 

Surplus 240,000      3,240,000 

Current  Liabilities: 

Accounts  Payable 235,000 

$3,475,000 

Some  portion  of  the  organization  expense  should  perhaps 
be  written  off,  but  as  this  is  a  matter  which  lies  within  the  dis- 
cretion of  the  directors  of  the  Safety  Razor  Company,  and 
as  they  have  apparently  taken  no  action  in  regard  to  it,  the 
entire  $75,000  is  carried  as  a  deferred  charge. 

In  solving  this  problem  it  is  necessary  to  make  an  assumption 
as  to  the  date  when  the  L  W  Company  made  its  entry  adding 
$100,000  to  the  carrying  value  of  its  investment  in  the  Steel 
Blade  Company  stock  and  to  its  surplus.  This  is  imperative 
in  order  to  determine  the  true  book  value  of  the  L  W  Company 
at  the  first  of  April  when  the  Safety  Razor  Company  acquired 
the  L  W  Company  stock.  The  problem  states  that  the  L  W 
Company  had  a  surplus  of  $605,000  at  January  1,  1912.  If  the 
$100,000  entry  was  made  prior  to  that  date,  the  true  surplus 
at  January  1  was  $505,000,  to  which  would  be  added  the  $30,000 


216  CONSOLIDATED  STATEMENTS 

profits  of  the  first  three  months  to  determine  the  surplus  at 
April  1.  The  working  papers  are  prepared  on  the  assumption 
that  the  write-up  was  made  prior  to  January  1,  1912.  On  the 
other  hand,  if  the  entry  was  made  in  1912,  the  true  surplus  of 
the  L  W  Company  at  January  1  was  $605,000  and  the  surplus 
at  April  1  was  $635,000,  making  the  goodwill  under  this  assump- 
tion $1,530,000,  instead  of  $1,630,000. 

This  problem  is  complicated  by  the  fact  that  the  L  W  Com- 
pany is  a  subsidiary  so  far  as  its  relations  with  the  Safety  Razor 
Company  are  concerned,  and  a  holding  company  so  far  as  its 
relations  with  the  Steel  Blade  Company  are  concerned.  Con- 
sequently there  is  an  investment  account  to  eliminate  from  the 
Safety  Razor  Company's  balance  sheet  and  also  an  investment 
account  to  eliminate  from  the  L  W  Company's  balance  sheet. 
After  writing  oflF  the  $100,000  arbitrary  addition  to  the  L  W 
Company's  investment  in  Steel  Blade  stock,  both  of  these 
investment  accounts  are  carried  at  cost.  Hence  eliminations 
are  made  by  deducting  the  book  value,  at  the  date  of  acquisi- 
tion, of  all  stock  held  within  the  organization.  Since  the 
consolidated  balance  sheet  is  prepared  from  the  viewpoint  of 
the  Safety  Razor  Company  as  the  parent  corporation,  the  date 
of  its  stock  purchase  governs  and  not  the  date  when  the  L  W 
Company  acquired  the  Steel  Blade  stock.  In  other  words, 
on  April  1  the  Safety  Razor  Company  obtained  control  of  all 
of  the  stock  of  both  the  L  W  Company  and  the  Steel  Blade 
Company;  the  total  inter-company  stock-holdings  are  repre- 
sented by  two  accounts  of  $2,500,000  and  $300,000  (after  writ- 
ing off  $100,000).    Hence  the  goodwill  is  computed  as  follows: 

Investment  Accounts  (at  cost): 

On  Safety  Razor  Company's  books $2,500,000 

On  L  W  Company's  books 300,000    $2,800,000 

Eliminate  book  value  at  date  of  acquisition  by  Safety  Razor  Co.: 
Capital  Stock: 

L  W  Company 400,000 

Steel  Blade  Company 600,000 

Surplus: 

L  W  Company " 535,000 

Steel  Blade  Company 65,000*    1,470,000 

Goodwill $1,330,000 


APPENDIX  C 


217 


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APPENDIX  C  219 

Comments 

Adjustment  (A)  is  a  debit  to  the  Jones  Investment  Com- 
pany's Surplus  and  a  credit  to  its  account  of  investment  in 
Stock  of  Company  A,  taking  out  of  surplus  the  $100,000  write- 
up  of  the  investment,  and  reducing  the  investment  account 
to  its  cost  to  permit  the  determination  of  goodwill  by  eliminat- 
ing book  value  at  acquisition. 

Adjustment  (B)  is  a  debit  to  Deficit  and  a  credit  to  Plant 
of  Company  B,  to  record  the  fire  loss. 

The  reserve  for  inter-company  profit  in  inventories  is  necessi- 
tated by  the  fact  that  the  B  Company  sold  goods  to  the  A  Com- 
pany during  1916,  on  which  they  made  a  profit  of  $10,000,  and 
these  goods  remain  in  the  A  Company's  inventory.  75  per  cent 
of  the  $10,000  is  an  unrealized  inter-company  profit. 

The  reserve  for  inter-company  profit  on  construction  is 
necessitated  by  the  fact  that  Company  A  made  a  profit  of 
$15,000  by  constructing  a  part  of  the  plant  of  Company  C. 
As  the  holding  company  owns  60  per  cent  of  the  stock  of  Com- 
pany A,  60  percent  of  the  $15,000  is  an  unrealized  inter-com- 
pany profit. 

THE  JONES  INVESTMENT  COMPANY 

AND  SUBSIDIARY  COMPANIES-CO.  A,  CO.  B  AND  CO.  C 

Consolidated  Balance  Sheet 

June  30, 1916 

Assets 
Fixed  Assets: 

Goodwill $177,000 

Plant $1,955,000 

Less  Reserve  for  Inter-Co.  Profit 9,000       1,946,000     $2,123,000 

Current  Assets: 

Inventories 350,000 

Less  Reserve  for  Inter-Co.  Profit 7,500  342,500 

Accounts  Receivable 250,000 

Cash 210,000  802,500 

$2,925,500 

Liabilities 
Capital: 

Capital  Stock $2,000,000 

Surplus 116,750     $2,116,750 

Minority  Interests: 

Company  A— 40% 520,000 

Company  B— 25% 178,750 

Company  C— 20% 110,000          808,750 

$2,925,500" 


220 


CONSOLIDATED  STATEMENTS 


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APPENDIX  C 


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222  CONSOLIDATED  STATEMENTS 

THE  JONES  INVESTMENT  COMPANY  AND  SUBSIDIARIES 

Consolidated  Surplus  Statement 

July  1,  1915— June  30, 1916 

Surplus,  July  1,  1915 $100,000 

Add  Profits  for  the  Year: 

For  Six  Months  Ending  December  31,  1915 $162,500 

For  Six  Months  Ending  June  30, 1916 88,250 

Total 250,750 

Less  Unrealized  Inter-Company  Profit: 

In  Inventories $7,500 

On  Construction 9,000  16,500        234,250 

Total 334,250 

Deduct  Dividends  Paid 217,500 

Surplus,  June  30,  1916 $116,750 


APPENDIX  C  223 

Solution  to  problem  ii. — Since  there  are  no  minority  inter- 
ests in  the  subsidiaries,  it  is  not  necessary  to  determine  the 
profits  of  the  individual  companies;  therefore  this  feature  of 
the  working  papers  is  omitted.  As  the  beginning  of  the  period 
is  also  the  date  of  acquisition,  the  so-called  inter-company 
profit  in  the  inventories  at  that  date  is  not  true  inter-company 
profit,  and  no  adjustment  is  made  for  it. 


224 


CONSOLIDATED  STATEMENTS 


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COMPA^fY  A  AND  SUBSIDIARIES  B  AND  C         Exhibit  A 
Consolidated  Statement  of  Cost  of  Goods  Manufactured  and  Sold 
For  the  Year  Ending  December  31, 1920 

Goods  in  Process,  January  1, 1920 $225,000 

Materials: 

Inventory,  January  1,  1920 $415,000 

Add  Purchases 985,000 

Total $1,400,000 

Less  Inventory,  Dec.  31, 1920 615,000        $785,000 

Labor 1,140,000 

Manufacturing  Expense: 

Miscellaneous 585,000 

Depreciation  of  Plant  and  Equipment       102,500  687,500       2,612,500 

Total  Manufacturing  Cost 2,837,500 

Deduct  Inventory,  Goods  in  Process,  December  31,  1920 '. . .       249,000 

Cost  of  Goods  Manufactured 2,588,500 

Add  Inventory  of  Finished  Goods,  January  1,  1920 235,000 

Total 2,823,500 

Less  Inventory  of  Finished  Goods,  December  31,  1920 376,000 


Cost  of  Goods  Sold $2,447,500 


COMPANY  A  AND  SUBSIDIARIES  B  AND  C  ExhibU  B 
Consolidated  Profit  and  Loss  Statement 
For  the  Year  Ending  December  31,  1920 

Sales $3,125,000 

Less  Cost  of  Goods  Sold  (Exhibit  A) 2,447,500 

Gross  Profit  on  Sales 677,500 

Less  Selling  Expenses 200,000 

Net  Profit  on  Sales 477,500 

Less  Administrative  Expenses 105,000 

Net  Profit  on  Operations 372,500 

Less  Bond  Interest: 

Interest  Accrued $12,500 

Less  Premium  Amortized 500  12,000 

Net  Profit  for  the  Year $360.500 

COMPANY  A  AND  SUBSIDIARIES  B  AND  C  Exhibit  C 
Consolidated  Surplus  Statement 
Year  Ending  December  31,  1920 

Surplus,  January  1,  1920 $210,000 

Add  Profits  for  1920  (Exhibit  B) 360,500 


Total 570,500 

Less  Dividends  Paid 150,000 


Surplus,  December  31, 1920 $420,500 


APPENDIX  C  229 

COMPANY  A  AND  SUBSIDIARIES  B  AND  C    Exhibit  D 

Consolidated  Balance  Sheet 

December  31, 1920 

Assets 
Current  Assets: 

Cash $185,000 

Accounts  Receivable 905,000 

Notes  Receivable 300,000 

Inventories: 

Raw  Material $665,000 

Goods  in  Process 260,000 

Finished  Goods 385,000 

Total 1,310,000 

Less  Inter-Company  Profit 70,000        1,240,000      $2,630,000 

Fixed  Assets: 

Plant  and  Equipment 2,050,000 

Less  Reserve  for  Depreciation 375,000 

1,675,000 
GoodwUl 242,500        1,917,500 

$4,547,500 

Liabilities 
Current  Liabilities: 

Notes  Payable 250,000 

Accounts  Payable 360,000 

Accrued  Bond  Interest 12,500  622,500 

Fixed  Liabilities: 

Bonds  Payable 500,000 

Deferred  Credits: 

Premium  on  Bonds 4>500 

Capital: 

Capital  Stock 3,000,000 

Surplus  (Exhibit  C)..; 420,500       3,420,500 

$4,547,500 


LilDrary 

Graduate  School  of  Buelness  Administration 

Univerelty  of  California 

los  Angeles  24,  California 


UCLA-GSM  Library 

HF5686C7F4 


L  005  019  890  2 


UC  SOUTHERN  REGIONAL  LIBRARY  FACILITY 


A    001  260  960    8 


SO!  'Tv^ERN  SRANCH, 

UNIVERSITY  OK  CALiro^NlA 

■  LIBRARY. 

rf_OS   ANGELES,  CALir. 


